Beginning in 2018, the estate- and gift-tax exemption -- a combined amount that applies to an individual's gifts made during life or assets left at death -- is doubling under the new tax law to nearly $11.2 million per individual or $22.4 million per married couple. The exemption is also adjusted for inflation.
This increase is set to lapse after 2025.
The number of estates the tax will apply to is expected to drop sharply as a result. According to estimates by the Tax Policy Center, about 1,700 estates are expected to owe that tax for 2018 out of about 2.7 million U.S. deaths. For 2017, an estimated 5,300 estates owed the tax.
-- No change on capital gains: One thing the tax overhaul didn't change: Assets held at death still aren't subject to capital-gains tax. This is known as the "step-up in basis."
For example, say that John dies owning shares of stock worth $100 each that he bought for $5, and he held them in a taxable account rather than a tax-favored retirement plan such as an IRA.
John's estate won't owe capital-gains tax on the $95 of growth in each share of stock. Instead, the shares go into John's estate at their full market value of $100 each. Heirs who receive the shares then have a cost of $100 each as a starting point for measuring taxable gain when they sell.
-- Unused portion of exemption is 'portable': The tax overhaul also didn't change the rules on "portability," a generous tax benefit for many married couples. It allows a surviving spouse to receive the unused portion of the federal estate-tax exemption of the spouse who died.
If John dies in 2018 leaving an estate of $2 million to his heirs other than his wife Susan, she could claim the $9.2 million of John's unused exemption for her estate.
The law also allows any taxpayer to give annual gifts to anyone -- a neighbor, friend or relative, or even a stranger -- up to a certain amount free of federal gift tax. An inflation adjustment raised this exemption from $14,000 to $15,000 per recipient for 2018. It's expected to take effect despite lower inflation adjustments mandated by the overhaul that will affect other inflation adjustments for 2018.
Above that amount, taxable gifts are subtracted from an individual's lifetime estate- and gift-tax exemption.
These annual gifts aren't deductible from income tax, but they do gradually remove assets from the giver's estate, and the total can add up. A husband and wife with three married children and six grandchildren, for example, could shift $360,000 a year to the 12 family members by using this benefit.
-- 'Bunching' gifts: In an alternative strategy, givers can "bunch" five years of annual $15,000 gifts to a 529 education-savings plan, typically for children or grandchildren.
No tax is due, but a gift-tax form should be filed, says Mark Kantrowitz, a college-savings specialist in Chicago.
The annual exemption can be used to transfer complex assets, such as fractional shares of a business, but expert help is recommended.
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(END) Dow Jones Newswires
February 13, 2018 12:19 ET (17:19 GMT)
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