The Tax Cuts and Jobs Act (TCJA) dramatically (but temporarily) increased the exemption level of the estate, gift and generation skipping tax by decreasing taxpayers liable for this tax by over two-thirds. The impact of this Act for the government compared with the $1 million exemption and 55% rate under another estate tax reduction law of 2001 (Economic Growth & Tax Relief Reconciliation Act – “EGRRRA), the new permanent rules were estimated to lose an average of about $37 billion over the next 10 years, a two-thirds reduction in estate tax revenues, with some estimating the reduction in revenues to be as high as $83 billion over the next decade if the Act is extended. For the individual taxpayer, the Act provides an exemption from federal estate taxes for the estate of an unmarried person valued in 2020 at $11 million and, twice that amount for the estate of a married couple, (with increases adjusted up for inflation each year).
That exemption level expires at the end of 2025, at which time those numbers fall back to 2017 levels (also adjusted for inflation), unless Congress moves to extend those higher thresholds. Accelerating the restoration of the pre-TCJA exemption levels would reduce the deficit while affecting just a few thousand very large estates. For most Americans, a debate about whether Congress will extend the exemption levels or allow to expire is purely theoretical because few estates are affected by this tax. It is a highly progressive tax, with about three-fourths collected from estates in which decedents are in the top 1% of the income distribution. Some organizataions who advocate for allowing the levels to drop at expiraiton in 2025 suggest that the increased exemption level cut the number of taxable estates from about 5,500 in 2017 to fewer than 2,000 in 2018 – approximately 0.2 percent of the estimated 2.7 million people who died in 2018.
Still, one can hope one wns the lottery or becomes the heir to a heretofore unknown wealthy relative or unexpected benefactor. When that happens, be sure to have your estate plan in order.
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