Gavin Howe
The Tax Cuts and Jobs Act of 2017 (TCJA) brought about several changes to the tax code, including an increase in the estate tax exemption. However, the TCJA included a sunset provision, meaning that some of the changes will only be effective until the end of 2025. As a result, the federal estate tax exemption amount is set to decrease from $14 million per person to $7 million per person in 2026. This reversion to pre-TCJA levels has been referred to as the great tax sunset and has significant implications for estate planning and wealth transfer goals. While there is uncertainty about the future of the TCJA, individuals with larger estates are encouraged to review their estate plans and consider strategies to take advantage of the current high exemption amounts.
| Characteristics | Values |
|---|---|
| Sunset laws | The Tax Cuts and Jobs Act of 2017 (TCJA) |
| Estate tax exemption amount in 2024 | $13,610,000 per person or $27,220,000 for a couple |
| Estate tax exemption amount after sunset laws | $5,490,000 per person (adjusted for inflation) |
| Federal estate and gift tax exemption amount before sunset | $14 million per person or $28 million per married couple |
| Federal estate and gift tax exemption amount after sunset | $7 million per person or $14 million per married couple |
| Tax rate on inherited wealth | 2% |
| Estate tax as a percentage of total federal revenues | Less than 3% |
| Federal revenue generated from estate tax in 2020 | $17.6 billion |
| Gift tax exclusion amount in 2018 | $19,000 per person |
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What You'll Learn
The Tax Cuts and Jobs Act of 2017
The TCJA made significant changes to individual taxes, including:
- Increasing the standard deduction from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for joint filers, reducing the number of people who benefit from itemized deductions.
- Altering the deduction for interest on home mortgages and equity by reducing the mortgage limit to $750,000 and limiting eligible home equity.
- Capping state and local tax (SALT) deductions at $10,000.
- Eliminating miscellaneous tax deductions for things like workplace expenses.
- Increasing the child tax credit.
- Doubling the indexed estate tax exemption, meaning people may not need to include charitable contributions in their will to reduce estate taxes, potentially reducing donations to charities and nonprofit organizations.
The TCJA also made substantial changes to business taxes, including:
- Reducing the corporate tax rate from 35% to a flat 21%.
- Providing a 20% deduction for pass-through income from business entities like partnerships and LLCs for individuals, except for certain service providers.
- Implementing a 100% bonus deduction for business assets purchased through the end of 2022 and increasing expensing provisions that phase out after that.
- Making significant changes to how corporations are taxed for international income, including exempting foreign-earned dividends from US income tax for those owning over 10% of a foreign corporation.
The TCJA was expected to stimulate the economy by increasing deficits, and it did lead to a temporary increase in investment. However, there was little evidence of changes in real economic activity, and corporate tax receipts declined significantly in the first quarter after its implementation. Additionally, the Act was criticized for benefiting large corporations and high-income individuals disproportionately while adversely impacting lower- and middle-income taxpayers.
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Estate tax exemption
The estate tax is a marginal tax on the right to transfer property at death. The taxable value of an estate includes cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets. The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the standard deduction for the estate tax exemption, reducing the tax burden on families and individuals. However, the TCJA included a sunset provision, making these changes effective only for tax years 2018 through 2025.
Due to this sunset clause, the federal estate and gift tax exemption amount is set to decrease from approximately $14 million per person (or $28 million per married couple) to approximately $7 million per person (or $14 million per married couple) starting on January 1, 2026. This reduction represents a significant decrease in the amount of assets that can be transferred free of federal estate and gift tax. As a result, individuals with assets exceeding the current exemption amount may consider utilizing the entirety of the federal exemption before the sunset date to lower their future estate and gift tax bill.
One strategy to maximize the current exemption is through lifetime gifting, which allows individuals to make use of the bonus exclusion amount ranging from $7 million to $13.61 million. Gifts made during one's lifetime are protected by the anti-clawback rule, which ensures that the exemption amount will be the greater of what was gifted or the current exemption at the time of death. Additionally, irrevocable trusts can be used to remove assets from an estate, shielding them from estate tax while maintaining some control over their distribution.
While the future of the estate tax exemption remains uncertain, individuals are advised to stay informed about potential changes to tax laws and begin assessing the impact on their estate plans and wealth transfer goals. It is recommended to seek guidance from trust and estate professionals to implement effective planning strategies, such as trust structures, multi-generational planning, charitable planning, and maximizing tax-advantaged accounts. By acting promptly, individuals can take advantage of the current higher exemption limits and ensure their assets are protected.
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Impact on individuals and families
The Tax Cuts and Jobs Act of 2017 (TCJA) brought about several changes to the tax code, including reduced income taxes and increased estate tax exemption. However, a sunset provision was included in the law, making some changes effective only until 2025. This means that unless there is further legislative action, some tax rules will revert to pre-TCJA levels in 2026.
The estate tax is a marginal tax, which means that as the value of an estate increases, the applicable tax rate also increases. The TCJA significantly increased the exemption amount, doubling it from $5,490,000 per person in 2017 to $13,610,000 per person in 2024, or $27,220,000 for a married couple. This higher exemption amount is set to expire at the end of 2025, after which the exclusion amount will revert to $5,490,000 per person, adjusted for inflation.
The impact of this upcoming change will vary for individuals and families. For those with smaller estates, the impact may be minimal as the adjusted exclusion amount will still be relatively high. However, for those with larger estates, the impact could be significant. The reduction in the exemption amount will result in a larger portion of their estate being subject to taxation, which could lead to a higher tax burden. This may particularly affect those with family-owned businesses or farms, who may face challenges in passing on their assets to the next generation.
To mitigate the potential impact of the sunset provision, individuals and families can consider various estate planning strategies. One option is to make use of the current higher exemption amount and gift more assets to beneficiaries before the exclusion amount decreases. Another strategy is to explore different types of trusts, such as irrevocable trusts, which can remove assets from an estate and shield them from estate taxes. Additionally, staying informed about the evolving tax laws and understanding how they may affect personal finances is crucial for effective estate planning.
While the future of the TCJA remains uncertain, individuals and families can take proactive measures to minimize the potential impact on their finances. By utilizing the current tax laws and seeking professional advice, they can optimize their estate plans and ensure a smooth wealth transfer to their beneficiaries.
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Congress' role in tax legislation
The role of Congress in tax legislation is to draft, debate, and enact tax laws. While the President can propose or advocate for specific tax policies, Congress has the power to make changes to tax laws. The President can sign a tax bill into law or veto it.
The process of formal tax legislation begins in the House of Representatives, where the tax bill is referred to the Ways and Means Committee. Once the committee members reach an agreement, the proposed tax law is written. The tax bill then goes to the full House for debate, amendment, and approval before being passed to the Senate for review. The Senate Finance Committee may rewrite the proposal before it is presented to the full Senate for approval. Following Senate approval, the tax bill is sent to a joint committee of House and Senate members who work to create a compromise version. This compromise version is then sent back to the House and Senate for final approval.
The Joint Committee on Taxation is a nonpartisan committee of the United States Congress that plays a crucial role in the tax legislative process. The committee is composed of experienced professionals, including economists, attorneys, and accountants, who assist members of both political parties in the House and the Senate on tax legislation. The Joint Committee Staff interacts with members of Congress and their staff on a confidential basis and is involved in all stages of the tax legislative process, ensuring consistency as tax bills move through committees and chambers.
In the case of the Tax Cuts and Jobs Act of 2017 (TCJA), Congress played a significant role in its enactment. The TCJA brought changes to the tax code, including reducing income taxes and increasing the estate tax exemption. However, a sunset provision was included in the law, making some changes effective only until 2025. Unless Congress takes action, the federal estate and gift tax exemption amount will decrease from approximately $14 million per person to approximately $7 million per person after the sunset date.
Congress has the power to extend the TCJA, make its provisions permanent, or repeal it altogether. Lawmakers may choose to extend the current exemption, revert to previous thresholds, reach a compromise, or adopt a new approach regarding the estate tax exemption. Citizens can influence tax laws through the informal tax legislation process by contacting members of Congress, attending meetings, participating in lobbying efforts, and voting for specific candidates.
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Estate planning strategies
The Tax Cuts and Jobs Act of 2017 (TCJA) brought about several changes to the tax code, including a reduction in personal income tax rates and an increase in the standard deduction. A sunset provision was written into the law, making some changes effective only for tax years 2018 through 2025. Unless Congress takes action, the federal estate and gift tax exemption amount will decrease from approximately $14 million per person (or $28 million per married couple) to approximately $7 million per person (or $14 million per married couple).
- Gifting: Making tax-free lifetime gifts, also known as "annual exclusion gifts," of up to $17,000 per person per year can reduce the size of your estate and, consequently, your estate tax bill. Certain payments for medical and tuition expenses made directly to healthcare providers or educational institutions also qualify for tax-free gifts.
- Trusts: Different types of trusts, such as irrevocable trusts, Charitable Remainder Trusts (CRTs), and Irrevocable Life Insurance Trusts (ILITs), can help remove assets from your estate, thereby reducing estate taxes. Trusts offer flexibility and control over how your assets are distributed.
- Life insurance: Life insurance can provide financial security for your heirs and cover estate taxes. Using an ILIT can keep the life insurance proceeds out of your taxable estate, maximizing the benefit for your beneficiaries.
- Charitable giving: Lifetime charitable contributions offer immediate income tax benefits and estate tax savings. By donating to qualified charities, you can reduce your taxable estate while supporting causes you care about.
- Professional guidance: Consult an estate planning attorney to tailor these strategies to your unique situation and ensure compliance with state laws. While the cost may range from $300 to $600 per hour, the long-term tax savings and peace of mind make it a worthwhile investment.
It is important to stay informed about potential changes to tax laws and understand how they may impact your estate plan and financial goals.
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Frequently asked questions
The estate tax is a marginal tax like personal income taxes. That means that as your estate’s taxable value increases, the tax rate that applies to it increases. The estate tax is often confused with inheritance tax, but they are two different taxes with separate rules.
The sunset law refers to the Tax Cuts and Jobs Act of 2017 (TCJA), which is set to sunset or expire in 2025. This means that the federal estate and gift tax exemption amount will decrease from approximately $14 million per person to approximately $7 million per person.
The sunset of the TCJA will result in a decrease in the estate tax exemption amount. This means that more estates will be subject to taxation, and the amount of tax payable will also increase.
