The Tax Cuts and Jobs Act of 2017 made substantial changes to U.S. laws starting in 2018. One of the most significant changes was to the federal gift and estate tax lifetime exemption.
In 2017, the exemption was $5.49 million. As such, only those estates with gross assets of more than $5.49 million were subject to the estate tax and had to file a federal estate tax return. The TCJA doubled the amount to $11.18 million for 2018, thus exempting additional estates from having a federal estate tax burden. The exemption was indexed for inflation every year and is $13.99 million for 2025. However, the exemption is scheduled to be halved beginning Jan. 1, 2026.
And while many expect this provision to be renewed, there are reasons why that might not be the case.
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Why you may want to use the full exemption now
The estate tax exemption is structured so that using the first half of the lifetime exemption for gifts will be counted permanently against the exemption amount. For example, if someone makes a taxable gift of $6 million in 2025, this will lower the remaining exemption to $7.99 million ($13.99 million minus $6 million) at the end of 2025. However, starting in 2026, if the law does not change, that person would have only about $1 million (roughly $7 million minus $6 million) of the lifetime exemption remaining.
However, suppose this person uses all their $13.99 million exemption in 2025. Their lifetime exemption starting in 2026 would be zero. The law does not allow the IRS to claw back any excess exemption used during 2018-2025. Future gifting opportunities would be limited to the annual inflation adjustment of the lifetime exemption. The tax rate for taxable estates of more than $1 million over the exemption amount is 40%. So, using the full lifetime exemption before it is halved in 2026 could result in substantial tax savings.
Reasons the provisions might not be renewed
With a new administration, many assume that all the expiring provisions of the TCJA will be renewed, either permanently or temporarily. This presumption could lead many to believe they can delay using their entire lifetime exemption beyond 2025.
However, the extensions of all the expiring provisions of the TCJA are not a sure thing. There are many reasons why some of these provisions could end permanently on December 31, 2025, without being renewed.
The Republicans will have only a 53-47 majority in the Senate. Unless there are 60 votes to invoke cloture, the Democrats can filibuster any potential legislation permanently. But there is an exception to this rule, a process called Reconciliation, which can be used to pass certain types of legislation, including tax-and-spend bills. The TCJA was passed using Reconciliation. Reconciliation includes a limitation on how much the bill can increase the budget deficit over a certain period. The TCJA had a limitation that the bill could increase the budget deficit only $1.5 trillion over 10 years. Any bill seeking to extend the TCJA provisions will likely have a similar limitation.
One provision expected not to be renewed is the $10,000 limitation on the state and local taxes (SALT) deduction. The SALT deduction mainly affected taxpayers in states with high state taxes. President-elect Donald Trump has vowed to eliminate this limitation.
In 2025, the Republican House majority will be much smaller than it was in 2017. A bill extending the TCJA provisions will likely need virtually every Republican to vote for the bill. Letting the SALT limitation expire may be one bargaining chip to get the bill passed.
The expiration of the SALT limitation would result in a substantial increase in the budget deficit. Thus, there would have to be either a tax increase or the elimination of a different tax cut to offset that increase. Letting the federal gift and estate tax lifetime exemption decrease to its inflation-adjusted pre-TCJA level would be one way to partially balance the increase in the budget deficit caused by the expiration of the SALT limitation.
Don’t miss out on potential tax savings
With the fate of the exemption uncertain, it would be prudent to use the full exemption now while you still can. By adopting this approach, you could save significant dollars in potential wealth transfer taxes that you would have been subject to should the exemption be halved at the end of 2025.
There are many strategies to take advantage of this opportunity to transfer significant wealth to family members. To see which plan is right for you, contact an experienced trust and estate practitioner to review your current plan for possible savings.
Related Content
- Changes to Estate Tax Are Coming... Six Options Congress Could Take
- Gift and Estate Tax vs Capital Gains Tax: Which Is Less?
- From Trusts to Taxes: Is Your Estate Plan Ready?
- How to Use Your Estate Plan to Save Tax Now: A Timely Update
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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