The federal estate tax can have a significant impact on your estate if you have been extremely successful from a financial standpoint. It carries a 40 percent maximum rate, and it is only relevant to high-net-worth individuals because a particular amount can be transferred tax-free. This is called the estate tax exclusion, and it is indexed annually to account for inflation.
Changes to this figure can have a major impact on your estate planning approach, and there is a big event looming on the horizon.
2024 Federal Estate Tax Exclusion
From 2011 through 2017, the exclusion was $5 million indexed for inflation, and the exact number in 2017 was $5.49 million. The Tax Cuts and Jobs Act was enacted in December 2017, and a provision in the measure doubled the exclusion with an inflation adjustment for 2018.
It was $11.18 million during that year, and it has steadily risen since then. In 2024, the exclusion is $13.61 million.
You do not have to pay estate taxes on transfers to your spouse if you are married, but this unlimited marital deduction is only afforded to American citizens. The estate tax exclusion is portable, so a surviving spouse can use their deceased spouse’s exclusion.
Federal Gift Tax
There is no reason to worry about the estate tax because you can just give gifts to get around it, right? This was true back in 1918 right after the estate tax was enacted, but the loophole remained open for just six years. A gift tax was put in place in 1924.
The anti-tax legislators said, “not so fast,” and it was repealed in 1926. People could give unlimited tax-free gifts for the next six years, but the gift tax came back in 1932, and it has stuck.
Since the gift tax and estate tax are unified, you would use a portion of your estate tax exclusion to give tax-free gifts while you are living. However, there is another chapter to the story.
Gift Tax Exemptions
There is an additional gift tax exemption that you can use to give a certain amount to any number of people equaling any amount of money tax-free each year. To be clear, you would not be using any of your unified gift and estate tax exclusion to give these tax-free gifts.
The annual per-person gift tax exclusion is $18,000 at the present time. If you are married, your spouse would have their own exclusion, so you can combine forces to give $36,000 to any number of gift recipients tax-free on an annual basis.
This is not the only exclusion that exists apart from the large multimillion-dollar unified exclusion. There is an educational exclusion that can be utilized to pay school tuition for students in a tax-free manner.
The institution must be paid directly, and the exclusion only applies to tuition. Of course, you can simply use your $16,000 annual exclusion to provide an additional boost if you are helping a loved one who is going to school.
If you want to pay medical bills, including health care insurance premiums, for others, you are not taxed.
2026 Estate Tax Exclusion Reduction
Now that we have provided all the necessary background information, we can get to the ultimate point. The provision in the Tax Cuts and Jobs Act that increased the exclusion to a record high level will sunset or expire at the end of 2025.
If there are no changes in the meantime, the exclusion will revert to the 2017 level of $5.47 million indexed for inflation on January 1, 2026. As a result, many more people will be exposed to the estate tax.
Schedule a Consultation Today!
There are estate tax efficiency strategies that can be implemented if your estate will be subject to taxation. We can help you mitigate the damage, and of course, you can work with our firm to develop a custom-crafted estate plan if taxation is not going to be a source of concern.
You can schedule a consultation at our Phoenix, Arizona estate planning office if you call us at 888-222-1328. If you would rather send us a message, use our contact form and we will get back in touch with you promptly.
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