Gift tax exemption set to increase next year

But a new administration could remove that benefit at any time.

With a new president comes new changes, but there is one trend that will remain the same, at least for now.

The estate and gift tax exemption will be increasing from $11.58 million per individual to $11.7 million per person or $23.4 million for a couple on Jan. 1, despite the change in the presidency. The tax exemption is the result of the Tax Cuts and Jobs Act that was signed into law by President Donald Trump in December 2017.

Since the TCJA was enacted, the tax exemption has been steadily increasing. In 2018, the tax exemption was $11.2 million per person. In 2019, that tax exemption was $11.4 million and the aforementioned estate and gift tax exemption this year is $11.58 million. 

The increase in the tax exemption margin is based on the Consumer Price Index (CPI), which is how the government manages inflation for the global economy, according to Jennifer Remondino, partner and estate planning attorney at Warner Norcross + Judd.

Jennifer Remondino

Now that the estate and gift tax exemption will increase to $11.7 million in 2021, individuals who are transferring money or assets valued up to $11.7 million at death (estate) or while alive (gift) will be exempt from paying 40% in taxes of the excess in credit in 2021, according to Varnum partner and estate planning attorney Chris Caldwell.

Prior to the TCJA, the estate and gift tax exemption stayed at $5 million between 2010 and 2012 because of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act that former President Barack Obama signed.

In January 2013, Obama signed the American Taxpayer Relief Act in which the estate and gift tax exemption steadily increased from $5.2 million in 2013 to $5.49 million in 2017.

“We always say that (the estate and gift tax exemption) is as permanent as any tax law, which is not permanent,” Remondino said. “This is the law we have today. We know that by 2026 the individual side of the Trump tax law wasn’t made permanent so we know that it will revert if Congress doesn’t make any changes in 2026. Anytime between now and then they can change it.”

If the TCJA is not changed, then on Jan. 1, 2026, the estate and gift tax exemption will revert to pre-2018 levels.

This is a dicey scenario, however, because President-elect Joe Biden can change or revoke that law anytime he’d like during his presidency with the consent of Congress.

If that is the case, Caldwell said that possible change can take place as early as next year. 

Remondino said as a planner, she is doing a lot of work with her high net worth clients to use the tax exemption now because of the uncertainty a new administration presents.

“What the Biden proposals are looking at is a lower exemption instead of $11.58 million (this year,)” she said.

In addition to the increase in estate and gift tax exemption next year and the instability of tax law, both Caldwell and Remondino said they are aware of the effect a Biden administration can have on the step-up basis for inherited assets. 

“If I paid $100 for a painting and when I wanted to sell that painting, I sold it for $200, my cost basis is $100 because that was what I paid. Now when I sold it for $200, I have a capital gain of $100 and I have to pay capital gains tax on that amount. But when someone dies, they get a step-up basis, so if I have that same painting for $100 and then I die and my wife sold the painting the next day, she would get a step-up basis on that. Instead of having a capital gain of $100 that someone has to pay tax on, the basis was $200, the sale price was $200 so there is no capital gain and no tax gets paid,” Caldwell said.

“That is a big tax savings for many, many people, because anyone who has anything of value that is appreciated over time or during their lifetime, benefits from that step-up basis. If that step-up basis goes away, then inheritances will most likely have tax implications that we don’t have today and those will affect people within any potential wealth range as opposed to the estate tax for people who have an estate that is worth multiple millions of dollars.”

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