Estate Planning Inflation Related Adjustments for Tax Year 2021

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Many estate planning provisions of the Internal Revenue Code contain brackets, exemptions, exclusions, deductions, or other figures that the Internal Revenue Service (IRS) adjusts annually for inflation. Recently, the IRS released these inflation adjustments for tax year 2021 in Revenue Procedure 2020-45.

Transfer Tax Provisions

Absent Congressional action to amend the transfer tax provisions of the Internal Revenue Code, in 2021, taxpayers will see their basic exclusion amount (and GST exemption amount) increase to $11,700,000 from $11,580,000.  This $120,000 increase from 2020 provides additional planning opportunities, including the ability to make additional, larger gifts during one’s lifetime without paying gift tax and to make late allocations of GST exemption.

Other relevant figures will increase slightly in 2021.  The annual exclusion for gifts to a spouse who is not a U.S. citizen increases to $159,000, a $2,000 increase from last year, and the gift amount from a foreign person that triggers information reporting obligations by the recipient increases slightly by $166 to $16,815.  The gift tax annual exclusion remains at $15,000.  The first $15,000 of a donor’s gifts to any one recipient during the calendar year will not incur federal gift tax or use the donor’s estate and gift tax exclusion amount. 

A summary table of relevant gift and estate figures as adjusted for tax year 2021 is provided below. Previous years are added for context.

Adjustment

2019

2020

2021

Basic exclusion amount and GST exemption amount

$11,400,000

$11,580,000

$11,700,000

Gift tax annual exclusion

$15,000

$15,000

$15,000

Annual exclusion for gifts made to spouse who is not a U.S. citizen

$155,000

$157,000

$159,000

Information reporting on large gifts received from a foreign person

$16,388

$16,649

$16,815

“2-Percent Portion” under § 6166

$1,550,000

$1,570,000

$1,590,000

Special valuation under § 2032A

$1,160,000

$1,180,000

$1,190,000

Estate and Trust Income Brackets

Unless Congress enacts new legislation, the tax rates for estates and trusts will not change in 2021.  What will change, however, is the amount of taxable income that places an estate or trust in a particular bracket.  These changes are highlighted by the table below.  

Tax Year 2020

Tax Year 2021

If Taxable Income is:

The Tax is:

If Taxable Income is:

The Tax is:

Not over $2,600

10% of the taxable income

Not over $2,650

10% of the taxable income

Over $2,600 but not over $9,450

$260 plus 24% of the excess over $2,600

Over $2,650 but not over $9,550

$265 plus 24% of the excess over $2,650

Over $9,450 but not over $12,950

$1,904 plus 35% of excess over $9,450

Over $9,550 but not over $13,050

$1,921 plus 35% of excess over $9,550

Over $12,950

$3,129 plus 37% of the excess over $12,950

Over $13,050

$3,146 plus 37% of the excess over $13,050

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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