On December 20, 2017, Congress approved sweeping tax reform legislation under the “Tax Cuts and Jobs Act.” The President is expected to sign the Act into law before the end of the year. Although the Act contains numerous provisions with a substantial impact on the income tax liability of individuals, families and businesses, the changes to the gift, estate and generation-skipping transfer (GST) taxes are more modest, and are outlined below.
Gift and Estate Tax Credit Doubles
Under current law, the credit against the gift and estate tax (the “Credit”) allows a taxpayer to transfer up to $5 million, adjusted for inflation, before any gift tax (for lifetime transfers) or estate tax (for transfers at death) is payable. The Credit in 2017 shields the first $5.49 million of gifts[1] from tax and is scheduled to increase to $5.6 million in 2018. Once the Credit has been exceeded, the gift or estate tax, as applicable, is imposed at a 40% tax rate.
Effective January 1, 2018, and until December 31, 2025, the Credit is doubled to $10 million, adjusted for inflation. Thus, the inflation-adjusted Credit amount in 2018 will be $11.2 million per individual ($22.4 million per married couple). As with existing law, once the Credit has been exceeded, the gift or estate tax, as applicable, continues to be imposed at a 40% tax rate.
Absent further legislation, the Credit will return to its current level of $5 million, adjusted for inflation, beginning January 1, 2026.
Exemption from GST Tax Doubles
Under current law, the exemption from the GST tax (the “Exemption”) allows a taxpayer to transfer up to $5 million, adjusted for inflation, before any GST tax is payable on transfers to grandchildren or other individuals two or more generations below the generation of the taxpayer. The Exemption in 2017 shields the first $5.49 million of transfers from the GST tax and is scheduled to increase to $5.6 million in 2018. Once the Exemption has been exceeded, the GST tax is imposed at a 40% tax rate. The GST tax is in addition to the gift or estate tax.
Effective January 1, 2018, and until December 31, 2025, the Exemption is doubled to $10 million, adjusted for inflation. Thus, the inflation-adjusted Exemption amount in 2018 will be $11.2 million per individual ($22.4 million per married couple). As with existing law, once the Exemption has been exceeded, the GST tax continues to be imposed at a 40% tax rate.
Absent further legislation, the Exemption will return to its current level of $5 million, adjusted for inflation, beginning January 1, 2026.
[1] Not all gifts are subject to tax. Exceptions include (1) transfers to a U.S. citizen spouse, (2) transfers to charity, (3) lifetime payments made directly to a qualified school for tuition, (4) lifetime payments made directly for health care expenses, and (5) lifetime transfers to an individual recipient not exceeding the annual exclusion amount in a calendar year, which will be $15,000 for 2018.
