When the Tax Cuts and Jobs Act (TCJA) went into effect on January 1, 2018, it temporarily doubled the exemptions for combined gift and estate taxes with a sunset date of December 31, 2025. As we near the expiration date, it is important for taxpayers to reassess their estate planning and gifting strategies to gain the greatest benefit from these temporary advantages.
Understanding Current Laws
Estate and gift tax go hand-in-hand as they are subject to the same federal tax rate and generally share the federal lifetime exemption amount. The lifetime exemption amount allows taxpayers to make tax-free gifts, either while alive or upon death, up to the established federal cap. In 2024, the federal lifetime exemption for most individuals is $13.61 million (or $27.22 million for married couples). The federal lifetime exemption amount is indexed for inflation annually.
However, the lifetime exemption amount does not include all annual monetary gifts. Taxpayers can take advantage of annual exclusion gifting before even utilizing any portion of their allotted lifetime exemption amount. In 2024, individuals can gift up to $18,000 per recipient tax-free (or up to $36,000 combined per recipient for married couples) generally without gift tax filing requirements. Gifts in excess of annual exclusion limits are considered “taxable gifts” for which a gift tax return is required, but for which gift tax is not actually due if the taxpayer has lifetime exemption remaining that can be applied (thereby reducing the taxpayer’s remaining lifetime exemption available for future use).
Prepare for upcoming changes
Unfortunately, the present record high exemptions are only temporary, as the federal lifetime exemption amount is set to revert to the pre-TCJA level of $5 million per person, to be adjusted for inflation, starting January 1, 2026, essentially cutting the exemption in half. The federal lifetime exemption could drop even lower than the pre-TCJA amounts in the future depending on political outcomes. Therefore, implementing a planning strategy now to take advantage of the increased exemption before the deadline is crucial for those in a financial position to do so. The temporary higher exemption amounts are “use it or lose it” – that is, any difference between the current exemption amount and post-2025 reduced amount will be lost if not used, so there is a unique window of opportunity here.
Maximize planning opportunities
It’s more important now than ever to work with your Waldron Rand team and your estate planning attorney to assess the opportunities available to you and create a personalized plan. Nonetheless, these are a few of the strategies that may help:
- Gift assets now.
- Help loved ones with qualified medical bills and education expenses.
- Donate to charity with increased AGI limits.
- Convert to a Roth IRA for future tax benefits.
- Consider setting up trusts to save on estate taxes and provide for heirs.