When you are planning your estate, you have to be mindful of its value relative to the federal estate tax exclusion. This is an amount that can be transferred tax-free, and the remainder would be subject to the tax and it is 40 percent top rate.
Each year, there are inflation adjustments, and they are announced toward the end of the previous year. The IRS has recently calculated the 2022 exclusion, and we will share it in this post.
2022 Federal Estate Tax Exclusion
You should digest some context to fully understand the current state of affairs. The estate tax was repealed throughout 2010 because of a provision in the Bush era tax cuts, and at the end of that year, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act was enacted.
Among other things, it established a $5 million exclusion for 2011, and this figure was in place indexed for inflation through 2017. During December of that year, the Tax Cuts and Jobs Act was enacted and signed into law by the president.
A provision in the measure doubled the estate tax exclusion indexed for inflation, and this resulted in an $11.18 million exclusion in 2018. There have been annual adjustments since that time, and throughout 2021, the exclusion has been $11.7 million.
For 2022, it is going up to $12.06 million.
It should be noted that a surviving spouse would be able to use their deceased spouse’s exclusion. This is called “portability” in accounting and estate planning parlance.
Another favorable rule for married couples is the unlimited marital deduction. There is no taxation on transfers between spouses as long as the people involved are American citizens.
Federal Gift Tax
Back in the day right after the estate tax was established in 2018, people would give gifts while they were living to avoid the tax. This window of opportunity remained open until a gift tax was enacted in 1924. In 1926, it was repealed, and it was reenacted in 1932.
We have had a gift tax since then, and it is unified with the estate tax under the tax code. This means that the multimillion-dollar exclusion applies to lifetime gifts along with your estate.
However, you have some latitude with regard tax-free lifetime gift giving. You can give as much as $15,000 to any number of people within a calendar year in a tax-free manner without using any of your larger unified exclusion.
This has been the threshold since 2018, but it is going up to $16,000 next year. In addition to this annual exclusion, you can pay school tuition for others tax-free, and you can also pick up the tab for health care-related expenses, including insurance coverage.
Sunset of Current Exclusion
The estate tax exclusion is going down to the $5.49 million level that was in place in 2017 when the relevant provision in the Tax Cuts and Jobs Act sunsets. This is going to take place on January 1, 2026, if there are no changes to existing laws in the meantime.
There is quite a difference, and with this in mind, you may want to consider using your gift tax exclusion to divest yourself of assets before 2026. Direct gift giving is a possibility, and you can also use the exclusion to fund certain types of tax efficiency trusts.
We can gain an understanding of your situation and help you position your assets in the ideal manner if the estate tax is going to be a factor for you.
2022 Medicaid Estate Tax Exclusion
We have a state-level estate tax in Connecticut, and the exclusion was $7.1 million for 2021. For 2022, it is going up to $9.1 million.
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Even if you are not going to face estate tax exposure, you should work with a lawyer from our firm to develop a custom crafted plan that is right for you and your family.
You can schedule a consultation at our estate planning offices in Glastonbury or Westport, CT if you call us at 860-548-1000. If you would rather send us a message, fill out our contact form will get back in touch with you promptly.