How Reform Has Changed Estate Tax and Gift Tax…

The IRS taxes wealth transfers through the the generation-skipping transfer tax, estate tax and gift tax. Together these taxes make up the federal transfer tax system. In addition, many U.S. states impose estate taxes.

Recent tax reform included in the Tax Cuts and Jobs Act made significant changes to gift and estate tax. The changes involve the exclusions available to taxpayers and are seen as favorable to those with estates worth more than $5.49 million.

In fact, starting this year (2018), the cost of transferring wealth has decreased due to larger estate tax and gift tax exemptions.

Take a look at this comprehensive guide on how tax reform has changed estate tax and gift tax.

1 – Estate Property Transfers

General Estate Tax

Prior law: Previously, each taxable estate was allowed an exemption from the estate tax on up to $5.49 million. Estate property valued over that was taxed at 40%.

New law: Up to $10 million (adjusted for inflation) can now be excluded from the gross estate of a decedent who died after tax year 2017 when determining estate tax. This change to the estate tax will be in effect through tax year 2025. In 2026, the estate tax exclusion will return to $5 million (adjusted for inflation). Tax reform did not affect beneficiaries’ requirement to use a stepped-up or stepped-down basis.

Generation-Skipping Transfer Tax

Prior law: The generation-skipping transfer tax is a tax on direct transfers to relatives more than one generation younger than the transferor, such as grandchildren or individuals who are at least 37.5 years younger than the transferor. Each taxpayer was allowed an exemption from the generation skipping transfer tax like the one available for the estate tax ($5.49 million for 2017). Any transfer over that was taxed at a rate of 40%.

New law: For purposes of the generation-skipping transfer tax, taxpayers can exclude up to $10 million (adjusted for inflation) for transfers made after 2017 through 2025.

In 2026, the basic exclusion amount will return to $5 million (adjusted for inflation).

Example: Bob gives cash and other property valued at a total of $15 million to his grandchildren through an irrevocable trust. Bob must report the transfer and pay tax on the amount that is more than his $10 million lifetime generation-skipping transfer tax exemption. The taxable portion is taxed at a 40% rate.

2 – Property Transferred as a Gift

Gift Tax

Prior law: Previously, a taxpayer could make a tax-free gift of up to $14,000 (adjusted for inflation) per person annually. Gifts over that amount were reportable on Form 706, United States Gift and Generation Skipping Transfer Tax Return. Once cumulative gifts exceeded the lifetime unified estate and gift tax credit of $500,000 (subject to inflation), the taxpayer would also have to pay gift tax.

New law: The per-gift annual exclusion amount for gifts was not affected by the new law, but has increased to $15,000 due to inflation adjustments.

Example: Bob gives $10,000 for his grandchild’s 2018 college tuition. While the tuition payment is considered a gift to the grandchild, Bob does not have to report the gift or use his lifetime unified estate and gift tax credit because the value of the gift is less than the annual exclusion amount.

Confused as to how tax reform will impact you? Bring in your 2017 tax return to one of our Block Advisors locations, and at no cost you will receive an analysis of how tax reform will impact you, a Second Look® Review, and suggestions on how to make appropriate W-4 adjustments to maximize your tax outcome. 


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