Gift and Estate Tax Exclusion: Latest Regulation from the IRS

Gift and Estate Tax Exclusion: Latest Regulation from the IRS

The Treasury Department and the IRS have issued final regulations recently.

The final regs, Treasury Decision 9884, implement changes made by the Tax Cuts and Jobs Act enacted in December 2017. An analysis of the regulations confirms that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 won’t see an adverse effect after 2025, when the exclusion amount is scheduled to drop to pre-2018 levels.

For 2020, the IRS has raised the annual estate and gift tax exemption to $11.58 million per individual taxpayer (in 2019, it was $11.4 million), while married couples can enjoy a $23.16 million exemption. Next year, the annual tax-free gift amount will remain at the 2019 level of $15,000. For those who wish to delve into the source material, the tax authority’s numbers for next year can be found in Rev. Roc. 2019-44.

For the most part, the final regulations adopt the proposed regulations published last November, although they also include clarifying language to address concerns raised in several public comments as well as four illustrations of the impact of inflation adjustments. As a result, individuals planning large gifts in 2018-2025 can go on with their plans without fear of losing the tax benefit of the higher exclusion level once it decreases post-2025.

There is one caveat: the 2020 elections. The President has vowed to make the tax code changes the new normal, while his Democratic rivals promise to drastically cut the exemption to the 2009 level of $3.5 million if they triumph. Predictability hinges on the outcome of the November polls.

Gift and estate taxes are calculated using a unified rate schedule, applied to taxable transfers of money, property, and other assets. Any tax due is determined after applying a credit—previously known as the unified credit—based on an applicable exclusion amount, which is the sum of the basic exclusion amount (BEA) established in the statute, and other elements described in the final regulations.

The tax law temporarily increased the BEA from $5 million to $10 million for tax years 2018-2025, with both dollar amounts adjusted for inflation. For 2019, the inflation-adjusted BEA is $11.4 million. In 2026, the BEA will revert to the 2017 level of $5 million, as adjusted for inflation.

Seeking to address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the IRS has provided in the final regulations a special rule allowing the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made while alive vs. the BEA applicable on the date of death.

For more information, please read:
IRS Issues Final Regs on Gift and Estate Tax Exclusion | ThinkAdvisor

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