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Estate Tax Increase Exemptions
Federal Estate Tax Exemption
The federal lifetime gift, estate, and GST estate tax exemption level will rise to $12.06 million on January 1, 2022, from $11.70 million on January 1, 2021. This implies that, instead of $23.4 million in 2021, a married couple will have $24.12 million in available exemption. High-net-worth persons who have exhausted their exemptions may want to make new contributions in 2022 to take advantage of the inflation-adjusted amount. The top federal estate tax rate is still 40% under current legislation.
Minnesota Estate Tax
The Minnesota estate tax exemption level will continue at $3.0 million as of January 1, 2022. Minnesota assesses an estate’s tax liabilities using a graded scale, with current estate tax rates ranging from 13 percent to 16 percent. Since it was raised to $3.0 million in 2020, the Minnesota estate tax exemption threshold has remained unchanged.
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No Claw Back
The Internal Revenue Service (IRS) issued regulations on November 26, 2019, confirming that an individual who makes a gift using the current higher gift and estate tax exemption would not be penalized if the exemption is lowered in the future. Until these regulations were created, there was concern that if the exemption was lowered, the protection provided by the enlarged exemption would constitute “clawback.”
For gifts made and estates of decedents dying before January 1, 2018, the estate and gift tax exemption was $5 million, indexed for inflation after 2011. For gifts made and decedents dying after December 31, 2017 and before January 1, 2026, the exemption has been increased to $10 million, also indexed for inflation. The exemption is $11.58 million for 2020. Prior to the IRS’s release of the new regulations, there was speculation that an individual who made a gift using the increased exemption and who dies after 2025 would lose the protection afforded by the increased exemption. The new regulations eliminate this concern.
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No Change in Step-Up Basis
When an asset is handed on to heirs after death, a practice known as “step up” in basis is employed to avoid capital gains taxes. The heirs acquire a basis in inherited property equal to the fair market value on the day of death. As a result, the difference between the initial cost to the dead taxpayer and the value at the time of death that is passed on to the heirs is avoided, which would otherwise be a capital gain.
Only inherited property that is part of a deceased person’s estate, as well as property inherited from foreign people who are not subject to US inheritance tax, are subject to the fair market basis rule. It makes no difference whether or not a federal estate tax return is submitted. In addition, only the inherited share of property owned jointly with the dead by the inheriting taxpayer is eligible for stepped up basis. It does not apply to the portion of the estate that the inheriting taxpayer shared with the dead (note, there are special exceptions for community property transferred to a surviving spouse).
When President Biden’s proposed tax proposal was still being debated by several congressional committees on July 26, 2021.
Both Republicans and Democrats expressed alarm and resistance to the idea to eliminate the “step up” in basis based on the date of death. As a result, the House Ways and Means Committee presented their tax plan on September 13, 2021, without including the provision, securing the stepped-up base for the time being. The Build Back Better Bill then reintroduced the contentious basis adjustment clause, although it was later deleted from the “final” bill enacted by the House Representatives on November 19, 2021.
As negotiations between parties and elected officials continue, amendments to the Build Back Better legislation are likely. Other tax elements will be removed from the Bill if Build Back Better survives. The basic “step up” provisions might be revived in a future Reconciliation Bill, although this is exceedingly improbable. The date of death basis “step up” tax laws are expected to stay in effect as of the writing of this blog unless the Senate finds a few more votes.
Watch this to know more about Step-Up Basis – https://www.youtube.com/watch?v=KhwBQvAL9cU&t=17s
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Gift Tax Exemption Increase to $16k
There are a lot of federal tax issues to consider before making gifts now that we are far into 2022. To summarize:
- The yearly deduction for gift taxes has increased from $15,000 to $16,000.
- The lifetime exemption for gift and estate taxes has increased from $11.7 million to $12.06 million.
- The lifetime exemption for generation-skipping transfer taxes has increased from $11.7 million to $12.06 million.
Gift Tax Annual Exclusion
The yearly federal gift tax exclusion has raised from $15,000 to $16,000 after four years. The annual exclusion is the amount of money you can contribute to or for the benefit of a single individual in a calendar year without having to submit a federal gift tax return (Form 709) or lowering your lifetime exemption (discussed below). You may “split” presents with your spouse if you’re married, thereby doubling your yearly exclusion. For example, if you are married and your spouse agrees, you can donate
Gift/Estate Tax Lifetime Exemption
It is a prevalent misperception that if you give more than the yearly exclusion to a single recipient, you must pay gift taxes. A lifetime gift and estate tax exemption amount is available to every taxpayer. The lifetime exemption will rise from $11.7 million to $12.06 million in 2022. The lifetime exemption would decline to around $6.2 million by the end of 2025 unless the tax regulations change. Gifts in excess of the above-mentioned yearly exclusion count against your lifetime exemption and must be reported on a Form 709 gift tax return. In most cases, you’ll only have to pay federal gift taxes if your total lifetime donations exceed the exemption amount. Connecticut is now the only state with its own gift tax.
The gift tax and the estate tax are intertwined. If you have a will, your executor will calculate the value of your estate and add it to the total taxable donations you made during your lifetime. If you don’t have a will, your estate administrator will calculate the value of your estate. If the total amount (after deductions) in the year of your death is higher than the lifetime exemption, your estate must pay estate tax on the excess. Depending on the size of your estate, rates range from 18 percent to 40%. Some states have their own estate taxes, with varying levels of lifetime exemptions. Other states levy an inheritance tax depending on the value of after-death transactions and your relationship to the recipient.
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Gift Tax Exclusion
Annual Exclusion for Gift
In 2022, the yearly exclusion level for gifts will rise to $16,000. Since the sum climbed from $14,000 in 2017 to $15,000 in 2018, the yearly exclusion has remained same. This implies that an individual can give anyone up to $16,000 ($32,000 for a married couple) without having to pay a gift tax or submit a gift tax return (IRS Form 709). Any gift in excess of $16,000 reduces the federal estate tax exemption available upon death.
Get Your Taxes Done Right
Taxes may make gift-giving a little more difficult but remember: nothing beats the thrill of giving a present to someone in need! Generous individuals are also happier and more fulfilled. You bless yourself as well as others when you bless them. When it comes to contributing, there are a few tax issues to bear in mind, but don’t let that scare you!
If you’re feeling uncertain about what to do with your gifts—or any other tax situation—we’ve got your back. Get in touch with us to make sure all your bases are covered and address the uncertainty. Lion’s Wealth Management will take the time to get to know you and your financial situation so they can help you file your taxes with confidence!
