Although the estate and gift tax exemption for 2022 is $12.06 million per person, meaning a married couple can pass $24.12 million tax-free, this is only temporary. The exemption will automatically revert to $5 million (adjusted for inflation) in 2026 if Congress doesn’t make any changes before then.
While there’s no way to know now what revisions (if any) will be enacted to the estate-tax and gift-tax laws, it’s a good idea for you to make “annual exclusion” gifts before the end of the year. These gifts don’t count toward your exemption and can be up to $16,000 per person this year ($32,000 if your spouse joins in the gift).
If you’re in a position to do so, you should consider making much larger gifts. This is because the Treasury Department issued regulations stating that there won’t be a “clawback” if you make a gift now and the exemption is later reduced.
Another reason is that President Biden has suggested eliminating the “step-up tax basis.” If you’re not a tax expert, you may wonder what this even means and how it applies to you.
Briefly, many assets passed down through your estate will have gained in value between the date you purchased them and the date of your death, and this gain in value would ordinarily result in a capital gain.
That is, when appreciated assets are sold, the seller may owe capital gains taxes on the appreciation. The amount of the gain is generally the sales price minus the “basis,” which is usually the original purchase price.
Under current law, though, when the assets are acquired through inheritance, there’s a step-up in basis, so that an heir’s basis is the present fair market value instead of the original purchase price.
This concept is easier to understand using an example:
Mary bought shares of stock for $5,000 many years ago and those shares are now worth $1 million. If she sells those shares, she’ll owe capital gains tax on $995,000.
If, however, she passes away and leaves the shares to her son Dave, who immediately sells the stock for $1 million, he won’t owe any capital gains tax. This is because Dave’s basis is $1 million – despite the fact that Mary’s basis was only $5,000.
If step-up basis is eliminated, Dave will have the same basis in the stock that his mother did ($5,000), so even if he immediately sells the stock for $1 million as in the scenario above, he’ll owe capital gains on $995,000.
A further reason to consider year-end gifting is that, in addition to the federal estate tax, nearly half the states have a state estate or inheritance tax. In Oregon, the exemption from estate tax is only $1 million, and in Washington, it’s only $2.193 million.
Please feel free to contact us if you have questions about or need assistance with your estate planning. We have established safety procedures in light of the COVID-19 pandemic so that you can safely complete this important task.
You may also be interested in obtaining a copy of Estate Planning (in Plain English)®, written by members of this law firm and available through Skyhorse Publishing, Amazon, Barnes and Noble, and Bookshop (an online bookstore that allows you to support your favorite independently owned bookshop.)
Photo by freestocks on Unsplash
