You probably already know that the U.S. tax code got a bit of an overhaul in 2017. Under the previous administration, tax rates for businesses and individuals were cut, the standard deduction and family tax credits were increased, personal exemptions were eliminated and deductions for state and local income taxes and property taxes were cut back, among other changes.
But one of the more impactful parts of the Tax Cuts and Jobs Act of 2017 involved changes to the estate tax, limiting the number of people who have to pay. Short story: Today the federal estate tax exemption is $11.7 million, which means that a deceased person can leave up to $11.7 million in assets without paying federal estate or gift taxes.
What are we talking about? The estate tax exemption is adjusted for inflation every year but at its current level less than 1% of estates actually end up paying anything. The current exemption is set to expire in 2026, but the Biden administration has proposed significant cuts to the estate tax exemption as part of a broader overhaul of the tax code.
A bit of history: This all started with the Revenue Act of 1916, which introduced the first tax on wealth transfers by any deceased U.S. citizen over $50,000. The exemption was slowly adjusted over the years, following inflation and updates until 2009 when it reached $3.5 million. That year, only 5,700 estates paid a transfer of wealth tax. The exemption continued to rise until it was doubled to $11.18 million in 2017.
But the 2017 move came with an expiration date. If nothing else happens in the meantime, the estate tax exemption will drop back to what it was before, $5.6 million, on January 1, 2026.
What’s changing? The Biden administration proposal would lower the threshold to $3.5 million by 2022. Whether or not this actually happens is still an open question.
Right now with the current $11.7 million threshold, there are very few Americans who have to deal with this, because it’s such a high threshold. Under the new law, it’s going to have an impact on a greater percentage of the population. Especially with the change in the elimination of the step-up of basis that threshold has been changed at $1 million.
DeAnna Alger, CPA
Why you should care: Let’s be real here, even $3.5 million is a pretty high threshold for the vast majority of Americans. It’s one thing to save up $4M+ for your retirement, but it’s another thing entirely to have that much left over at your death in order to pass it on to your heirs. Still, this is a potential variable to keep in mind when assembling your estate plan.
