Simon Lever Learning Community Presents: How the TCJA May Impact Your Estate Planning
The Tax Cuts and Jobs Act (TCJA) of 2017 enacted considerable modifications to federal tax law. To see how the new legislation may affect your estate planning, let’s look at some of these changes.
The Annual Gift Tax Exclusion caps the value of gifts that a person can make tax free to another person every year. Currently, this threshold is $15,000, after a $1,000 increase was enacted last year by the TCJA. Gifts are not considered taxable income to the recipient as long as the total value does not surpass that amount.
Also, the nature of the gift doesn’t matter:
- Gifts may be one-time or given throughout a 12-month period.
- They can be cash or capital assets such as stocks, property or a vehicle.
You can give untaxed gifts to as many people as you’d like in any calendar-year period as long as each gift does not exceed $15,000. Gifts exceeding that amount are taxable and count against your lifetime gift tax exemption.
The Lifetime Gift Tax Exemption is the total amount of untaxable gifts you can give away in your lifetime. The TCJA more than doubled the lifetime exemption cap to $11.18 million per person in 2018 from $5.49 million in 2017. To the extent the lifetime gift exemption is used, you will reduce the amount available to offset against the estate tax—this is referred to as “the unified gift and estate exemption.”
This change has a significant effect on estate planning. When someone passes away, the federal government assesses a 40% tax rate on the value of the estate. The lifetime gift tax exemption eliminates any federal estate taxes on all gifts made to heirs in your lifetime or upon your death if the total amount does not exceed $11.18 million.
What Happens When You Make a Taxable Gift?
When you make a gift to an individual above the exempted annual or lifetime gift tax exemption, the amount in excess is taxable. Typically, the donor pays the gift tax.
Also, the gift tax exemption limits are set to individual. For example, if you make a $60,000 gift to your son for a down payment on his house, the taxable amount is $45,000. However, if you’re married, you and your wife can each make a gift of $15,000 to your son. You and your wife can also each make gifts of $15,000 to your daughter-in-law. In this example, the entire $60,000 would fall under the annual gift tax threshold. As you can see, planning can have a significant impact in preserving your lifetime exemption.
Gift amounts exceeding the annual exemption will reduce your lifetime gift exemption accordingly. Taxable gifts must be reported to the IRS on Form 709, the United States Gift (and Generation-Skipping Transfer) tax return.
Regardless of the amount, some gifts are never considered “gifts” and therefore are not subtracted from annual or lifetime gift exemptions:
- You can give gifts of any size to your spouse if he or she is a U.S. citizen. (There are applicable considerations if your husband or wife is not a U.S. citizen.)
- You can pay for anyone’s tuition or medical expenses. They do not need to be related to you to qualify for this exception, but you must give directly to the medical or educational institution.
- You can make gifts to a political organization exceeding the gift tax thresholds without it being counted against your annual or lifetime limits.
The new legislation is temporary. As of now, the new provisions are set to expire on December 31, 2025. For the provisions to remain permanent, Congress will need to extend or repeal the TCJA by that date.
For more information on annual or lifetime gift tax exemptions, or any matters related to estate planning, contact us today. We’ll be happy to make sure all your questions are addressed, and all needs are covered.