Estate Planning For The Long Run

Estate Planning For The Long Run

2018 Estate and Gift Tax Limits

February 3, 2017

Estate Gift Tax Limits

The IRS adjusts the various items for inflation periodically, including the estate and gift tax. Starting on January 1, 2018, the annual exclusion amount, the gift and estate tax credit and the exemption from the generation-skipping transfer tax (GSTT) will all increase.

Annual Exclusion from Gift Tax

Transfers made by a person during his or her lifetime are typically subject to the gift tax. The circumstances where the gift tax do not apply are: (1) transfers to a spouse who is a U.S. citizen, (2) transfers made to charitable organizations, (3) tuition payments made on a person’s behalf directly to a qualified school, (4) payments made on a person’s behalf directly to a health care provider, and (5) transfers in value up to the “annual exclusion amount.”

The annual exclusion amount applies to the total amount of transfers made to any individual in a given calendar year. This exclusion can be applied to an unlimited amount of people every year. Since 2013, the annual exclusion amount has been $14,000. On January 1, 2018 this exclusion amount will increase to $15,000.

Consider the following example. Person A can a gift of up to $15,000 to three separate individuals for a total of $45,000, without paying taxes on any of those transfers. However, if person A made a gift of $45,000 to one individual then Person A will be required to pay gift tax on $30,000 ($45,000-$15,000) at a rate of 40%.

One thing to be aware of is that the amount from transfers excluded during life is deducted from the total exclusion amount after death. In 2017 the total exclusion amount is $5.49 million. On January 1, 2018, the exclusion amount increases to $5.6 million.

Exemption From GST

In addition to the gift and estate tax, a gift is also subject to the GSTT if made to a qualifying individual. The GST applies to a taxpayer for transfers made to an individual who is: two or more generations below the taxpayer, or a person who is more than 37 ½ years younger than the taxpayer. The GSTT is applied separately from the estate tax. This means that the GSTT is applied at 40% in addition to the 40% paid for the estate tax. The GSTT also has its own exemption applied separately from the exemption for the estate tax. The exclusion amount is $5.49 million in 2017, and it increases to $5.6 million on January 1, 2018.

An Uncertain Future

Despite the certain changes coming to the estate tax next year uncertainty looms as the Trump Administration has released its Tax Reform Framework. This framework and other tax plans propose the elimination of the estate tax and the GSTT tax while leaving the gift tax intact. Whatever your circumstances it is always wise to seek a licensed professional who is on the cutting edge of the law. Doing so will ensure your planning is up to date with current laws and prepared for the future.