What a difference two decades makes. In 1998, the federal estate and gift tax lifetime exemption was only $600,000. With a home, a modest IRA, and a life insurance policy, many middle class Americans had estates subject to estate taxes in the late 1990s.
Today, as a result of the tax cuts enacted by Congress late last year, the exemption has ballooned to $11.2 million. What’s more, a couple can pass $22.4 million to their heirs free of federal estate taxes by taking advantage of the “portability” election available upon the death of the first spouse.
Good News for Estates
This means that most people will no longer have to worry about paying any federal estate taxes when they die. In fact, statistics show that less than 0.1 percent of the U.S. population has an estate that is large enough to pay estate taxes under the current exemption amount. So if your estate is below $11.2 million when you die as a single taxpayer, or below $22.4 million for a couple, there are no federal estate taxes to be paid.
Good News for Lifetime Gifts
The growing lifetime exemption also means that you can give more money away during your lifetime to family members without having to worry about paying gift taxes. In 2018 the annual gift tax exemption rose to $15,000. (The current lifetime exemption is tied to inflation and will continue to grow each year until 2025.) This means that you can gift up to $15,000 per person without having to file a federal gift tax return, Form 709. If, however, you want to give more than $15,000 to one person, you can “cash in” some of your $11.2 million exemption now and not pay any gift taxes. That is because the lifetime exemption is like a coupon, allowing you to utilize the exemption to make large gifts and not pay any gift tax. The only rule is that you have to report gifts over $15,000 and advise the IRS that you have used up some of your lifetime exemption.
The Bad News
The bad news is that the $11.2 million exemption will expire in 2025, and in 2026 the amount will revert back to the old law, which was a $5 million exemption tied to inflation back to 2010. The actual number will probably be someplace between $6 million and $7 million. Still, at $6 million, the vast majority of Americans will not have to worry about estate taxes.
Beware of State Estate Taxes
While the federal government has been phasing out estate taxes, a number of states have taken advantage of the vacuum by implementing their own estate or inheritance laws. In 2018, the following states have some sort of estate or inheritance law: CT, DC, HI, IL, IA, KY, ME, MD, MA, MN, NE, NJ, NY, OR, PA, RI, VT, and WA. The lowest threshold for paying estate taxes is $1 million in Oregon and Massachusetts. Hawaii and Maine use an exemption of $11.2 million, the same as the federal exemption.
Currently Alaska does not have an estate or inheritance law. While the Alaska State Legislature has been contemplating some combination of new revenue sources, including income or sales taxes, so far there does not seem to be any push to implement an estate or inheritance tax.
If you retire and change residency to another state, you should talk with a CPA or tax attorney to determine if your estate will be subject to taxation when you die.