2018 Gift and Estate Tax Changes under the Tax Cuts and Jobs Act: Transfer More Wealth Tax-Free

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a wide array of changes to most areas of the tax law beginning with the 2018 tax year, including gift and estate taxes. Under the Act, taxpayers have the opportunity to reevaluate their gifting techniques and estate plans in order to maximize tax savings and transfer more of their wealth tax-free.

Annual Exclusion
The 2018 annual gift exclusion is $15,000, increased from $14,000 in 2017. This exclusion is the amount you can give away per person per year tax-free. In addition, married couples can elect to split gifts. Utilizing this strategy, married taxpayers can gift up to $30,000 to an individual in 2018 before a gift tax return is required. Annual gifting is an excellent way to reduce the value of a taxpayer’s gross estate over time, thereby lowering the amount subject to estate tax upon date of death.

Lifetime Exemption
The 2018 lifetime gift exemption is $11,180,000 (as indexed for inflation), increased significantly from $5,490,000 in 2017. This exemption is the total amount you can give away over the course of your entire lifetime tax-free. The Act more than doubles the lifetime exemption, but only temporarily. It is scheduled to sunset at the end of 2025 unless Congress renews the provision, upon which it would revert back to $5,000,000, and then be indexed for inflation.  

How it Works
As long as annual gifts don’t exceed the exclusion, the taxpayer’s lifetime exemption is not reduced.  When an annual gift exceeds the exclusion, the excess in that year is considered taxable. This taxable portion is reported on a gift tax return and reduces the taxpayer’s lifetime exemption, a balance that carries over year after year. Once the lifetime exemption is fully utilized, gifts exceeding the annual exclusion are subject to gift tax. Any leftover lifetime exemption not utilized during a taxpayer’s lifetime on gift tax returns effectively reduces the value of the taxable estate upon their date of death. The maximum federal gift and estate tax rates remain at 40% under TCJA.

Portability Election
The portability election remains under the Act. It is an imperative planning tool for taxpayers, especially if the death of a spouse occurs while the increased exemptions are in place. Portability allows the second spouse to have the benefit of the deceased spouse’s $11.2 million exemption, even if the second spouse dies under a lower exemption amount. Keep in mind that an estate tax return will need to be filed when the first spouse dies in order to make the portability election, even if the gross estate is under the filing threshold.

Basis Step-Up
No changes were made under TCJA to these provisions, which allow a step-up in tax basis for most inherited appreciated assets (excluding retirement accounts and annuities). Generally, basis is the amount paid for an asset. Upon death, the beneficiaries are allowed to increase the tax basis of an inherited asset to the fair market value at the date of the decedent’s death.  Basis step-ups are most commonly utilized for real estate and art, which allows beneficiaries to sell these items with less taxable gain.

These changes present an opportunity to take advantage of exclusions and exemptions of historically large amounts. As always with estate planning, it is necessary to stay apprised of current laws and limits, as they tend to change almost yearly. Make sure your tax preparer knows the details surrounding your estate plan and gifting intentions so that there are no surprises for either of you next tax season.

Should you have any questions about gift and estate tax, please contact your Marcum tax professional.