The federal estate tax exclusion is the amount that can be transferred before the remainder would potentially be subject to taxation. There was an estate tax repeal in 2010 because of a provision in the Bush era tax cuts. On December 17th of that year, the playing field changed when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted.
It established a $5 million estate tax exclusion, and that figure indexed for inflation remained in place through 2017. At the end of that year, the Tax Cuts and Jobs Act was approved by Congress and signed into law by the president.
Among other things, this tax bill essentially doubled the estate tax exclusion amount. It was $5.49 million in 2017, and it went up to $11.18 million in 2018. This figure has remained in place with inflation adjustments since then. In 2022, it stands at $12.06 million.
If you are married, you can use the unlimited marital deduction to transfer any amount of property to your spouse tax-free as long as your spouse is an American citizen.
On the subject of marriage and the estate tax, the aforementioned 2011 tax act made the estate tax exclusion portable between spouses. This means that a surviving spouse can use their deceased spouse’s exclusion, and portability has been retained since then.
Federal Gift Tax
The knee-jerk response to the estate tax would be lifetime gift giving, but there is a gift tax in place to close that window of opportunity. It is unified with the estate tax, so you are using a portion of your unified gift and estate tax exclusion to give tax-free gifts while you are living
However, there is a caveat. You can transfer up to $16,000 to an unlimited number of individuals each year free of transfer taxes. This is a separate annual exclusion that does not impact your available gift and estate tax exclusion.
There is an educational exclusion that can be used to pay school tuition for others free of taxation. You are also allowed to pay medical bills for other people without being taxed, including ongoing health insurance premiums.
Sunset of Tax Cuts and Job Act
They say that all good things must come to an end, and this appears to be the case when it comes to the record high estate tax exclusion that we have right now. The provision in the Tax Cuts and Act that increased the exclusion is going to expire when the clock strikes 12 on January 1, 2026.
At that point, the exclusion will revert back to the 2017 level of $5.49 million with an inflation adjustment. When you process all this information, you will recognize an opportunity. You can give gifts between now and then while the unified exclusion is over $12 million.
Estate Tax Efficiency Strategies
In addition to direct gift giving, the exclusion can be used to fund certain types of tax efficiency trusts. We can gain understanding of your situation and explain your option so you can make fully informed decisions.
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Managing Attorney at The Oakley Law Group
Steve is a father of five, a member of the Jonathan Club, veteran of the United States Army and spends his free time dabbling in aviation and supporting several non-profit organizations including, Freemasons of California, Scottish Rite Language Centers, the Burbank Noon Kiwanis Club, Quake Safe Seniors, UCLA Alumni Scholarships, and the Shriners’ Hospitals for Children.
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FAQs
As of January 1, 2026, the current lifetime estate and gift tax exemption will be cut in half, and adjusted for inflation. Families that may face estate tax liability in 2026 may benefit from transferring assets and their appreciation out of their estate sooner rather than later.
What happens to the federal estate tax in 2025? ›
However, without congressional action, at the end of 2025, the federal estate tax exemption will be reduced to approximately $7 million per individual pending final inflation adjustments due to a “sunset” provision in the Tax Cuts and Jobs Act.
What is the basic exclusion amount for 2026? ›
Because the BEA is adjusted annually for inflation, the 2018 BEA is $11.18 million, the 2019 BEA is $11.4 million and for 2020, the BEA is $11.58 million. Under the tax reform law, the increase is only temporary. Thus, in 2026, the BEA is due to revert to its pre-2018 level of $5 million, as adjusted for inflation.
What is the federal estate tax exemption for 2024? ›
Effective January 1, 2024, the federal estate and gift tax exemption amount increased from $12.92 million to $13.61 million per individual (a combined $27.22 million for a married couple), representing an increase of $690,000.
What is the tax change for 2026? ›
Income Tax
The TCJA also changed many deductions and exemptions, which would revert to pre-TCJA levels in 2026 without congressional intervention. Under the TCJA: Personal exemptions were eliminated, while the standard deduction was increased. The alternative minimum tax (AMT) exemption was increased.
Will the estate tax exemption sunset in 2026? ›
Unless Congress makes the change permanent, this provision will "sunset" on January 1, 2026, and the exemptions will revert to 2017 levels, adjusted for inflation—about half of what they are now. That might be around $7 million for individuals and $14 million for married couples.
Will the estate tax law change in 2025? ›
The increased estate and gift tax exemption, which is currently $12.92 million per person and increased to $13.61 million per person for 2024, is set to sunset at the end of 2025. As a result, the exemption will drop- back to the prior Tax Cuts and Jobs Act (TCJA) level of $5 million, adjusted for inflation.
What happens to portability in 2026? ›
Portability helps minimize federal gift and estate tax by allowing a surviving spouse to use a deceased spouse's unused gift and estate tax exemption amount. Currently, the exemption is $12.92 million, but it's scheduled to return to an inflation-adjusted $5 million on January 1, 2026.
Can my parents give me $100 000? ›
Can my parents give me $100,000? Your parents can each give you up to $17,000 each in 2023 and it isn't taxed. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit of $12.9 million.
Will the standard deduction go down in 2025? ›
The standard deduction will lower by almost half, adjusted for inflation. This adjustment will greatly increase the likelihood that you'll be itemizing your deductions going forward. The $10,000 limitation on state and local taxes (state income taxes, real estate taxes, personal property taxes, etc.) will be removed.
The exclusion for qualified bicycle commuting expenses is suspended for tax years 2018–2025. Employ- ers that reimburse employees for such expenses must include those reimbursem*nts in the employee's taxable income.
What is the lifetime exclusion for the IRS? ›
The lifetime gift tax exemption is the amount of money or assets the government permits you to give away over the course of your lifetime without having to pay the federal gift tax. This limit is adjusted each year. For 2024, the lifetime gift tax exemption is $13.61 million, up from $12.92 million in 2023.
Do beneficiaries pay federal estate tax? ›
Federal and state estate taxes are paid from the assets of your estate before the remaining assets can be distributed to your heirs. The executor or the trustee of a qualified grantor trust is responsible for filing the applicable federal and state estate tax returns and ensuring that all taxes are paid from estate.
How much money can be legally given to a family member as a gift? ›
A gift tax is a government tax imposed on those who give money or property to others in exchange for nothing (or less than total value). There is typically a tax-free gift limit to family members until a donation exceeds $15,000 (jumping up to $16,000 in 2022). In these instances, the IRS is usually uninvolved.
Does inheritance count as income? ›
Inheritances are not considered income for federal tax purposes, whether the individual inherits cash, investments or property.
Will portability go away in 2026? ›
The tax cuts are set to expire on January 1, 2026, at which point the exemption will drop down to around $6 million based on inflation. This means, even if a deceased spouse's current net worth is well below $12.06 million mark, the surviving spouse should still file the Federal Estate Tax return and elect portability.
Is federal estate tax changing? ›
Unless Congress acts, on Jan. 1, 2026, the estate, gift and generation-skipping transfer (GST) tax exemption amounts will be cut in half. A decrease in the exemption amount could result in significant additional transfer taxes for families with federally taxable estates.
What tax changes expire in 2025? ›
Under the TCJA, marginal rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. (Note: Taxes on capital gains and dividends were not changed by the TCJA.) Expires 12/31/2025 Marginal rates will revert to their permanent pre-TCJA levels of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
What will the federal estate tax exemption be in the future? ›
Due to inflationary adjustments built into the TCJA, the IRS recently announced that the federal gift and estate tax exemption will be increased to US$13,610,000 as of January 1, 2024 – a significant hike of US$690,000 per transferor (US$1,380,000 for a married couple).
The federal estate tax exclusion is the amount that can be transferred before the remainder would potentially be subject to taxation. There was an estate tax repeal in 2010 because of a provision in the Bush era tax cuts. On December 17th of that year, the playing field changed when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted.