The ability to use the increased exclusion offered in the 2017 Tax Cuts and Jobs Act enacted by Congress needed some revision, and the IRS and Department of Treasury has done just that.
At issue is the gift and estate tax exclusion. The exclusion in 2017 was $5 million, but in 2018 – thanks to the new law – the exclusion jumped to $11.18 million. The exclusion will remain and be indexed for inflation until 2025, when it will drop back to an inflation-adjusted $5 million
And that’s the rub
Those who would want to use the increased tax exclusion were worried if they would be penalized after 2025 when the exclusion drops back to the 2017 level.
Gift and estate taxes are calculated using a rate schedule on taxable transfers of property, money and all other assets. The schedule includes a tax credit based on the excludable amount.
The tax credit is used on gifts during the taxpayer’s life, and then on the estate upon the taxpayer’s death.
But what happens if the taxpayer gives gifts of more than $5 million and is still alive when the exclusion drops in 2026? Will the taxpayer or the taxpayer’s estate be penalized for the amount over $5 million?
A tax law clarification
That’s the problem the Department of Treasury and the IRS sought to clarify: New rules allow the taxpayer or the taxpayer’s estate to use whichever tax credit is higher: The one before 2025 or the one applicable on the date of death.
Included in the calculation is the fact that Congress allows the gift and inheritance exemption to increase with inflation. The $11.18 million credit in 2018 is worth $11.4 million in 2019. In addition, the readjustment to $5 million in 2026 will also be adjusted for inflation at that time.