How Will the Federal Estate Tax Exemption Change in 2026?

 Posted on October 21, 2022 in Taxation Law

There are multiple different types of taxes that apply to the income a person earns and the assets they own. Wealthy individuals and families will need to be aware of the estate taxes that may apply, as well as how they can transfer wealth while minimizing taxes. The federal estate tax is levied after a person's death. Fortunately, exemptions are available, and estate taxes will only apply to estates that are worth more than the amount of these exemptions. The Tax Cuts and Jobs Act of 2017 significantly increased the estate tax exemption, but this law is scheduled to sunset in 2026. This change may have an impact on how a person or family may address issues related to estates.

What Are the Current Estate Tax Exemption Levels?

For 2022, the exemption level for the estate tax is $12.06 million per person. This means that an individual can have up to $12.06 million worth of property at death without incurring any estate tax liability. For married couples, the exemption level is doubled, meaning they can have up to $24.12 million worth of property at death without incurring any estate tax liability. This exemption also applies to lifetime gifts given by a person or couple. That is, an individual may give gifts of up to $12.06 million to others during their lifetime without being required to pay taxes on these gifts.

What Is Changing in 2026?

In 2026, the exemption levels for the estate tax are scheduled to revert back to their pre-2017 levels. For individuals, this means that the exemption level will be $5 million. For married couples, the exemption level will be $10 million. These amounts are adjusted for inflation, and it is estimated that the individual exemption will be between $6.5 million and $7 million.

How Will These Changes Affect Me?

For individuals or married couples with assets above the exemption amounts, the reduced estate tax exemption that is scheduled for 2026 could have a significant impact on estate planning. There are a few different strategies that can be used to minimize exposure to estate taxes, even with a reduced exemption. These strategies include: 

• Making use of the annual gift tax exclusion - A person or couple may give gifts to others, which can reduce the value of their estate. While gift taxes apply to certain gifts, there is an annual gift tax exclusion that will allow gifts to be made without being taxed. In 2022, an individual may give up to $16,000 tax-free, or a married couple may make a gift of $32,000. These exclusions apply per person, and multiple tax-free gifts may be given to different parties, allowing for significant reductions of a person or couple's taxable estate each year. 

• Estate tax exclusion portability - Following the death of one spouse, the other spouse may inherit assets from their partner without being subject to estate taxes. The surviving spouse may then apply the doubled estate tax exemption to the assets they own. This will allow them to give gifts of up to $24.12 million without being subject to taxes. Due to recent changes to IRS policies, a spouse can elect portability within 5 years after their partner's death, and they can do so by filing an estate tax return.

• Creating a trust - There are many different types of trusts that can be used for estate planning purposes. Trusts can be used to minimize exposure to both estate and gift taxes. 

Contact Our San Jose, CA Tax Planning Lawyer

The scheduled changes to the estate tax exemptions mean that some individuals and couples who have not been using trusts or other strategies to minimize their exposure to estate taxes may now need to start doing so. There are a number of different ways to minimize exposure to both estate and gift taxes. If you want to know more about the best strategies for preserving your assets and passing them on to your loved ones, John D. Teter Law Offices can provide you with guidance and legal help. Contact our San Jose estate and gift tax attorney at 408-866-1810 to arrange a consultation and learn how we can help you devise a plan that meets your unique needs and goals. 

Sources:

https://www.investopedia.com/estate-tax-exemption-2021-definition-5114715

https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

https://www.cnbc.com/2022/07/21/the-wealthy-now-have-more-time-to-avoid-estate-taxes.html