Estate Tax under the Tax Bill

If the Tax Cuts and Jobs Act passes, the number of estates subject to the death tax is about to get even smaller, at least temporarily.

Generally speaking, the Basic Exclusion Amount is the aggregate amount a taxpayer may transfer, during life and/or at death, to persons other than spouse or charity without incurring estate or gift tax.  In certain cases, the Basic Exclusion Amount can be augmented by the Deceased Spouse Unused Exemption Amount (DSUEA); i.e., unused exemption the taxpayer “inherited” from a deceased spouse.

Under current law, the Basic Exclusion Amount is $5.0 million, adjusted for inflation. The inflation-adjusted amount for 2017 is $5.49 million. Thus, a married couple can shelter almost $11 million from federal estate tax.

As noted here, the Basic Exclusion amount was set to rise to $5.6 million in 2018. That was before the Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act:

  • Retains, and does not repeal, the federal estate tax
  • Retains the federal gift tax
  • Retains basis step-up
  • Leaves the tax rate at 40%
  • Doubles the Basic Exclusion Amount

The Basic Exclusion Amount for 2018 will be $11.2 million. Future years will continue to see inflation-adjustments.

The gift tax annual exclusion–currently $14,000 per person per year, but rising to $15,000 in 2018–is unaffected by the Tax Cuts and Jobs Act.

The new provision is only effective for tax years 2018 through 2025. Thus, the doubling of the Basic Exclusion Amount is effectively temporary. Due to the Byrd rule, this provision of the Tax Cuts and Jobs Act will sunset in 2026 unless ratified by a future Congress. In the absence of future Congressional action, in 2026 the Basic Exclusion Amount will revert to $5.0 million, adjusted for inflation (approximately $6.1 million, according to some commentators).

UPDATED TO ADD: Here’s the full statutory text:

SEC. 11061. INCREASE IN ESTATE AND GIFT TAX EXEMPTION.

(a) IN GENERAL.—Section 2010(c)(3) is amended by adding at the end the following new subparagraph:

(C) INCREASE IN BASIC EXCLUSION AMOUNT.—In the case of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting ‘$10,000,000’
for ‘$5,000,000’.

(b) CONFORMING AMENDMENT. Subsection (g) of section 2001 is amended to read as follows:

(g) MODIFICATIONS TO TAX PAYABLE.

(1) MODIFICATIONS TO GIFT TAX PAYABLE TO REFLECT DIFFERENT TAX RATES.—For purposes of applying subsection (b)(2) with respect to 1 or more gifts, the rates of tax under subsection (c) in effect at the decedent’s death shall, in lieu of the rates of tax in effect at the time of such gifts, be used both to compute—

(A) the tax imposed by chapter 12 with respect to such gifts, and

(B) the credit allowed against such tax under section 2505, including in computing—

(i) the applicable credit amount under section 2505(a)(1), and

(ii) the sum of the amounts allowed as a credit for all preceding periods under section 2505(a)(2).

(2) MODIFICATIONS TO ESTATE TAX PAYABLE TO REFLECT DIFFERENT BASIC EXCLUSION AMOUNTS. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this section with respect to any difference between—

(A) the basic exclusion amount under section 2010(c)(3) applicable at the time of the decedent’s death, and

(B) the basic exclusion amount under such section applicable with respect to any gifts made by the decedent.

(c) EFFECTIVE DATE. The amendments made by this section shall apply to estates of decedents dying and gifts made after December 31, 2017.

For more on the Tax Cuts and Jobs Act, click here.

Source: Tax Cuts and Jobs Act, p. 102 (pdf)

Posted by: Joel D. Roettger, JD, LLM, EPLS

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