If you are mapping out your estate, you might be concerned about how the expiration of the 2017 Tax Cuts and Jobs Act (TCJA) could affect your plans.
The 2017 Tax Cuts and Jobs Act (TCJA) temporarily increased the basic exclusion amount from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2019, the inflation-adjusted basic exclusion amount is $11.4 million. In 2026, the basic exclusion amount will revert to the 2017 level of $5 million, adjusted for inflation.
Generally, federal estate and gift taxes are calculated using a unified rate schedule on taxable transfers of money, property, and other assets. Making a taxable gift during your lifetime reduces your lifetime exclusion amount. For instance, because the amount for 2019 is $11.4 million, you can gift $1 million, and still have $10.4 million available to give or to pass on at your death without having to pay tax.
For many, the 2017 reform raised concerns regarding potential tax consequences for any large gift made from 2018-2025, while the decedent is still living.
Good news, however: The IRS has confirmed regulations to changes made by TCJA, ensuring that individuals are still able to make substantial gifts between 2018 and 2025 without losing the tax benefit of the higher exclusion level once it decreases after 2025.
The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute plus other elements (if applicable) described in the regulations. The credit is first used during life to offset gift tax, and any remaining credit is available to reduce or eliminate estate tax.
To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the final regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.