Near the end of each year (usually in October) the Internal Revenue Service updates a number of inflation-adjusted income, estate and gift tax figures for the upcoming year. Well before the official figures are released, though, some private groups usually can predict the next years’ changes. We already know the estate and gift tax thresholds for 2018, though not officially.
For 2018 the figures for several important estate and gift tax numbers will change, and Bloomberg BNA has projections about a host of those numbers. Also covered in the Bloomberg BNA report are projected income tax changes, but those are both harder to explain and (usually) of less significance for planning. Besides that, all of the updated figures are subject to the possibility of Congressional changes — though the future of tax reform in the Congress is far from clear at this point.
Estate tax thresholds
For 2017, the federal estate tax kicked in at $5.49 million dollars. In other words, a decedent dying this year with an estate of less than that figure would be liable for no federal estate tax. State estate tax thresholds sometimes follow the federal figure, though they usually do not. Arizona addresses that problem by simply not having a state estate tax at all.
The current figure means that a married couple can have up to $10.98 million if they both die this year. Above that amount they might have to pay at least some federal estate tax. The figure for the first spouse to die is the amount for the year of their death. Also, a federal estate tax return must be filed for that first spouse to take advantage of the doubled exemption.
Of course there are other complications to review before fixing on that $10.98 million figure for 2017. Did either spouse make large enough gifts during life that they were required to file a gift tax return? If so, the maximum figure might be reduced. Though it is usually an oversimplification to say that a married couple can have $10.98 million without worrying about federal estate taxes, that is not far off.
Changes for 2018
Now we get word from Bloomberg BNA that the 2018 figure will go up substantially. It will probably reach $5.6 million for a single person. That would mean $11.2 million for a married couple. There are probably not a lot of people with assets between the old and new figures. Still, the increase will provide an additional measure of comfort to the 99%+ of us who have accumulated wealth of less than the federal estate tax exemption amount.
By the way, the increase to $5.6 million applies to Generation Skipping Transfer Tax thresholds, as well. That means that an individual can leave up to the new, higher in trust for grandchildren and later generations without worrying about incurring an additional tax liability. But note: the amounts are not cumulative — the same $5.6 million can use up both the estate tax and the generation-skipping tax exclusion amounts.
Gift tax increases
Almost everyone understands that an individual can give up to $14,000 to another person without incurring any gift tax liability. A few people may have some distant memory of the figure being just $3,000 (it was set at that level from 1942 until 1981). Others might think it is $10,000 (that was the number from 1982 to 2001). Curious about the changes? There’s a handy chart available online showing the figures for years up until 2014.
As the chart indicates, the gift tax exclusion amount has been $14,000 per year since 2013. Next year it is will increase to $15,000, according to Bloomberg BNA.
Note that the the gift tax exclusion amount only increases when the inflation adjustment would change the figure by $1,000. That means that the $15,000 figure will probably be effective for several years. The last increase, for example, lasted for five low-inflation years.
Taking maximum benefit of gift tax rules
Remember that the annual gift tax exclusion amount can be doubled for married couples. It also applies to each recipient. In other words, a couple can give twice the exclusion amount to each child. They can also add in-laws, grandchildren and others to the recipient list.
Gift tax rules are confusing. The federal government has not mandated that gifts over $15,000 ($14,000 until the 2018 change) are prohibited, or even taxed. It’s just that a gift tax return has to be filed for larger gifts.
Although a gift tax return may be required, it is unlikely that any gift tax will be due. Estate and gift tax thresholds are interrelated. Remember that $5.6 million estate tax exemption amount? That’s both an estate and a gift tax threshold figure.
Once an individual exceeds the $15,000 annual gift tax exclusion amount, they begin to use up their $5.6 million lifetime exemption amount. In other words, if you make a $100,000 gift to your daughter (lucky her!), the first $15,000 will be consequence-free. The remaining $85,000 will reduce your $5.6 million estate tax exemption to $5.515 million.
In addition to estate and gift tax thresholds
A host of other tax-related figures will change in 2018, too. That’s part of the fun of learning the federal tax system. Just when you get one years’ numbers memorized — they change. This year may see even more changes, as Congress debates possible tax reform measures.
In the meantime, your estate planning probably will not depend much on the federal (or, in Arizona, state) estate and gift tax thresholds. That’s because they have risen to the point that few people are much affected. Still, the new higher numbers will give some people more flexibility for their planning.