The IRS imposes a tax on certain gifts given during a person's life and property as a result of a person's death. Lifetime gifts are subject to gift tax and are reportable to the extent that the total value of a donor's gifts to a recipient in any given year exceeds the annual gift tax exclusion amount – $ 15,000 in 2021 (as may be applicable). In the event of death, an individual's estate may be subject to estate tax if the death date value of their taxable estate exceeds the remaining lifetime gift and estate tax exemption.
The gift and estate tax exemption allows a fixed value for gifts and transfers to be made free of gift and estate tax for life upon death. At the start of 2017, the exemption amount was $ 5.49 million per person, or $ 10.98 million for married couples who duly transferred the unused portion of the exemption to the surviving spouse. The 2017 Tax Reduction and Employment Act ("TCJA") temporarily doubled the gift and estate tax exemption, reducing the inheritance tax charge to fewer estates and significantly reducing the tax liability of many estates. The TCJA adjusts the inflation exemption amount each year through 2025. At this point, the exemption will be reduced to the pre-TCJA amount of $ 5.49 million (adjusted for inflation).
The current gift and estate tax exemption is $ 11.7 million for those who die in 2021 or $ 23.4 million for married couples. However, President-Elect Biden's campaign platform included a proposed cut of this exemption to $ 3.5 million per person or $ 7 million for married couples, which is well below the pre-TCJA amount. Along with this decline, the Biden campaign proposed an increase in tax on those goods in the upper tax bracket from 40 percent to 45 percent. The substantial reduction in the exemption coupled with the increased tax rate on estates in the top tier could result in many more estates being subject to tax liability and a substantial increase in tax on estates greater than a few million dollars.
While the exemption cannot ultimately be reduced to just $ 3.5 million, the favorable democratic makeup of the legislature and executive could result in a significant reduction in the exemption. In addition, President-elect Biden has not indicated whether his proposal would apply the reduced exemption retrospectively to the beginning of 2021, which could affect the carryovers made in 2021 before a legislative measure. In the past, a reduction in the exemption amount did not normally apply to completed transfers. However, as there is no way of knowing for sure until the legislation is in place, this research remains open and poses additional challenges in identifying the best strategy for planned donations.
Proposal to reform the estate tax: eliminate the increase in the cost base for capital gains