A new tax law affecting the wealth transfer system became effective January 1st of this year. The new law, known as the Tax Cuts and Jobs Act (TCJA), offers a truly unique opportunity to transfer portions of your wealth to your loved ones with fewer tax penalties.
Are you taking advantage of the new law?
Tax exemption amounts increase
This new law increases the annual tax exemption amount of federal estate, gift, and generation-skipping transfer (GST) from $5,490,000 to $11,200,000 per individual. That amount doubles to $22,400,000 for married couples.
Under this law, the exemption amounts will increase each year – adjusting for inflation – until January 1, 2026, at which time the exemption amounts will revert back to 2017 amounts, once again adjusted for inflation.
This leaves a 10-year window of opportunity to transfer some of your wealth while avoiding penalties usually associated with the transfer of wealth.
Gift tax increases to $15,000 per individual
The annual gift tax exclusion amount – the amount you can gift an individual in a given year without reducing the tax exemption amounts listed above – increased under the new law from $14,000 to $15,000.
Two things to keep in mind:
- The $15,000 exemption amount is for an individual, which means that both you and your spouse can gift that amount to an individual
- The $15,000 is not the total amount you can gift per year; rather it is the maximum you can gift – per individual – without reducing the tax exemption amounts listed above
For example, if you and your spouse have one child, you could each gift your child $15,000 – for a total of $30,000 – without reducing the $22,400,000 exemption amount.
What if you have 10 and 5 grandchildren? You and your spouse could each gift $15,000 to each of them, for a total of $450,000 – again, without reducing the exemption amount.
Will you be subject to estate or generation-skipping transfer taxes?
If you are single and your estate is worth more than $11,200,000, only the portion that is above and beyond the exemption amount would be taxable. The same applies if you are married, but using the $22,400,000 exemption amount.
Update your estate plan to take advantage of the new law
As you can see, this is an excellent time to review and possibly update your estate plan – if you haven’t done so already – in order to take full advantage of this somewhat rare opportunity to transfer wealth to your future generations with far fewer tax penalties.