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Large Gifts Made Now Won’t Adversely Impact Estates after Tax Year 2025

Following enactment of TCJA, concerns were voiced that an estate tax could apply to gifts exempt from gift tax by the increased BEA.  However, the final regulations include a special rule that allows estates to compute their estate tax credit using the higher of the BEA applicable to gifts made during life OR the BEA applicable on the date of death.

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Following enactment of TCJA, concerns were voiced that an estate tax could apply to gifts exempt from gift tax by the increased BEA.  However, the final regulations include a special rule that allows estates to compute their estate tax credit using the higher of the BEA applicable to gifts made during life OR the BEA applicable on the date of death.

In an effort to clarify language within the Tax Cuts and Jobs Act (TCJA) after concerns were raised over the impact of inflation adjustments regarding large gifts, the Treasury Department and the IRS have just issued final regulations that will come as good news to many.  This is particularly true since this is the time of year when many are engaged in year-end planning. 

The directives confirm that those taking advantage of the increased gift and estate tax exclusion amount in effect for tax years 2018 through 2025 will not be unfavorably impacted after 2025 when the exclusion amount is slated to fall back to pre-2018 levels.

The final regulations closely mirror proposed regulations made public in November of 2018, but more clearly define inflation adjustments on large monetary gifts. As such, individuals planning to make large gifts up to and including tax year 2025 do not have to worry that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

In general, gift and estate taxes are calculated on taxable transfers of money, property and other assets through the use of a unified rate schedule. Taxes that may be due are determined after applying a credit based on an applicable exclusion amount, which is the sum of the basic exclusion amount (BEA) established in the statute, and other elements, if applicable, as described in the final regulations. This credit is first used during one’s life to offset any gift tax while any remaining credit is used to reduce or eliminate any estate tax.

Of significant note as part of the TCJA is the temporary increase of the BEA from $5 million to $10 million for tax years 2018 through 2025, with both amounts adjusted for inflation. In tax year 2026 the BEA will revert back to the 2017 level of $5 million as adjusted for inflation. Parenthetically, the inflation adjusted BEA for tax year 2019 is $11.4 million.

Following enactment of TCJA, concerns were voiced that an estate tax could apply to gifts exempt from gift tax by the increased BEA. However, the final regulations include a special rule that allows estates to compute their estate tax credit using the higher of the BEA applicable to gifts made during life OR the BEA applicable on the date of death.

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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