|
|
The Tax Cuts and Jobs Act has brought the most significant changes to the income tax for businesses and individuals in the last few decades. Whether these changes will grant the new tax law stardom or notoriety remains to be seen.
For now, while we are still waiting for the IRS to flood us with the new rules and regulations necessary to the implementation of the TCJA, here is some basic information on the changes that impact the estate tax and gift tax between January 2018 and December 2025.
Although the estate tax and its fundamental structure are not altered, most figures and amounts are changed. But first, let us clarify some terms.
|
|
|
|
|
|
|
While elsewhere in the world the terms estate and inheritance might be used interchangeably, in the United States there is a difference between them, mostly from the taxation pint of view.
The key difference between estate and inheritance taxes lies in who is responsible for paying them. An inheritance tax is based on who receives a deceased person's property and how the beneficiary is related to the deceased person, while an estate tax is based on the value of the deceased person's estate and not on who inherits what.
The inheritance tax is imposed by a state government on the privilege of certain heirs to receive a deceased person's assets.
The federal government does not have an inheritance tax.
The following six states collect an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. In all these six states assets left to a surviving spouse are exempt from the tax, but only four states exempt transfers to descendants.Top tax rates range from 4.5 percent (Pennsylvania on lineal heirs) to 18 percent (Nebraska on collateral heirs).
|
|
|
Depending on your relationship to the decedent, you may receive an exemption or reduction in the amount of inheritance tax you must pay. For example, most states exempt a spouse from the tax when they inherit the property from a husband or wife. Children and other dependents may qualify for the same exemption, though in some cases, only a portion of the inherited property may qualify. Generally, the higher rates of tax will be paid by those who inherit property from a decedent with whom they have no familial relationship.
Of course, state laws are subject to change, so if you are receiving an inheritance, check with your state's tax agency.
The estate tax is imposed by the US federal government and a number of US states on the right to transfer property to your heirs after your death. The tax applies to property that is transferred via a will or according to state laws of intestacy. Other transfers that are subject to the tax can include those made through an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries.
The estate tax is one part of the Unified Gift and Estate Tax system in the United States, the other part of the system, the gift tax, applies to transfers of property during a person's life.
Being a tax on your right to transfer property at your death, the estate tax consists of an accounting of everything you own or have certain interests in at the date of death.
|
|
|
|
|
|
The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your Gross Estate. The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your Taxable Estate.
These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
Of these deductions, the most important is the deduction for property passing to (or in certain kinds of trust, for) the surviving spouse, because it can eliminate any federal estate tax for a married decedent. However, this unlimited deduction does not apply if the surviving spouse (not the decedent) is not a U.S. citizen.
After calculation of the taxable estate is complete, you have to increase the amount by the value of all taxable gifts made since 1977. Gifts of property or money that your recently deceased family member made during his/her life are taxable if they exceed certain annual limitations. The tax is then reduced by the available unified credit.
|
|
|
There are several credits against the tentative tax, but the most important of all is the unified tax credit which can be thought of as providing for an exemption equivalent or exempted value with respect to the sum of the taxable estate and the taxable gifts during lifetime.
In other words, the unified tax credit (named so because federal gift and estate taxes are integrated into one unified tax system) is the amount exempted or free of tax from the total value of an estate.
|
|
|
|
|
Before the TCJA was enacted into law, the exemption amounts for 2018 would have been $5.6 million per individual and $11.2 million per couple. The TCJA doubles the amount an individual may transfer free of tax either by gift during lifetime or at death.
Under the TCJA, the exemption amounts for 2018 are $11.2 million per individual and $22.4 million per couple. For years 2019 through 2025, the exemption amounts will be adjusted for inflation.
One popular feature of the current estate tax law is that spouses can combine their estate tax exemptions, effectively letting married couples give away or leave almost $22.4 million without owing tax. The new law makes this feature, called “portability” by tax experts, permanent.
In addition, in 2018, the annual per donee gift tax exclusion will increase to $15,000. (The annual per donee gift tax exclusion had been at $14,000 since 2013.) |
|
|
That means that each year, any person can give to any other person up to $15,000 without having any obligation to file a gift tax return or use any of the combined gift and estate tax exclusion mentioned above.
Estates whose value exceeds the exemption amount are required to file a federal estate tax return and pay estate taxes at the federal estate tax rate of 40% in 2018.
A non-resident alien is subject to a different regime for estate tax than U.S. citizens and residents. The estate tax is imposed only on the part of the gross non-resident alien's estate that at the time of death is situated in the United States. These rules may be ameliorated by an estate tax treaty. The U.S. does not maintain as many estate tax treaties as income tax treaties, but there are estate tax treaties in place with many of the major European countries, Australia, and Japan.
We need to mention here the generation-skipping tax (GST) as well which, according to the TCJA, shares the same lifetime exemption as the federal estate and gift taxes.
|
|
|
|
|
| The generation-skipping tax, also sometimes called the generation-skipping transfer tax, can be incurred when grandparents directly transfer money or property to their grandchildren without first leaving it to their parents. The GST doesn't apply to grandchildren only. It also addresses gifts or transfers made to other family members and to unrelated individuals who are at least 37 1/2 years younger than the donor. All such beneficiaries are referred to as "skip persons." |
|
Apart from the federal estate tax, the following states collect their own tax on residents’ estates: Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
Recently, District of Columbia announced its plans to match the federal estate exemption this year, while the state of New York plans to do the same by 2019. New Jersey announced that they would be repealing their estate taxes this year following in the footsteps of Tennessee two years prior, and Indiana in 2013.
Like federal estate taxes, each state’s estate tax laws are also subject to change at any time, and we always recommend speaking with a tax attorney before beginning your estate planning. |
|
|
Anyone who wishes to avoid paying estate taxes already knows how crucial estate planning is and that there are various means of reducing or eliminating the tax. One of the more common means of protecting an estate from taxes is to place money into trusts and elect a trustee to transfer the property to your beneficiaries upon your death. Once money has been allocated into a trust it is removed from your listed estate and, upon your death, it will be distributed to your heirs free from estate and inheritance taxes.
Some people also choose to give their money in the form of gifts to organizations and establish a charitable gift annuity. Receiving money from an annuity protects your heirs from paying any inheritance tax, although they may still be responsible for an early withdrawal penalty from the IRS.
|
|
|
Generally, property you receive as a gift, bequest, or inheritance isn't included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income also is taxable to you. If the gift, bequest, or inheritance is the income from property, that income is taxable to you.
Today, 99.8 percent of estates owe no estate tax at all, according to the Joint Committee on Taxation. Only the estates of the wealthiest 0.2 percent of Americans (approx. 2 out of every 1,000 people who die) owe any estate tax. The Joint Committee on Taxation estimates that the number of estates which will pay any estate tax will drop from 5,000 in 2017 to 1,800 under the new law. This is because of the high exemption amount, which has jumped from $650,000 per person in 2001 to $5.49 million in 2017 and to $11.2 million per person in 2018.
|
|
|
|
|
If you have already made plans for your estate, this is a good time for a review and revision of existing estate plans.
Perhaps the most important thing you need to know about an estate or inheritance tax is that the inheritance, estate, and gift tax codes are some of the most complex in the entire Internal Revenue Code, therefore an attorney or accountant should be consulted in situations that involve such matters. |
|
|
|
|
|
|
