Last year we covered updates arising from the federal Tax Cuts and Jobs Act concerning the estate tax. The beginning of the year 2020 has similarly brought on changes to the law regarding the estate tax. Like last year, these changes impact the threshold amount of the estate tax exemption.
Of course, even these recent changes will “sunset” in 2025 without any further legislative action, so reviewing your unique situation with a skilled estate attorney is crucial to your family's financial future. Below, we've created a quick breakdown of what you need to know about the gift and estate tax exemption in 2020.
EXPANSION TO THE ESTATE TAX EXEMPTION
In 2019, the Tax Cuts and Jobs Act raised the ceiling of the estate tax exemption to $11.4 million. This year, the scope of this exemption has increased yet again. Now, the exemption applies to estates that amount to $11.58 million or less. Once your assets exceed $11.58 million, the excess amount will be taxed at a 40% rate.
THE EFFECT OF LIFETIME GIFTS
The rules concerning the impact that lifetime gifts have on one’s eligibility for the estate tax exemption are particularly important for estate planning. For example, if you have an estate totaling $12.58 million, $1 million of your estate would be subject to the estate tax. However, if you made lifetime gifts to others in the aggregate of $1 million before you die, your estate would be at the new $11.58 million threshold. Therefore, the entirety of your estate would not be subject to the estate tax.
THE MARITAL DEDUCTION AND PORTABILITY FOR SURVIVING SPOUSES
The marital deduction prevents spouses who are full U.S. citizens from incurring tax liability on the estate they inherit from their spouse. Any taxes accrued regarding your estate will only become due upon the passing of your spouse who inherited your estate.
The 2020 increases to the estate tax exemption also impact the portability of the exclusion from a deceased spouse to their surviving spouse. As previously discussed, “portability” refers to a spouse’s ability to claim unused exclusion amounts from the spouse who died.
Like last year, surviving spouses can only take advantage of portability if the spouse who passed away previously filed a federal tax return. Also, portability continues not to be automatic. Instead, the executor of the deceased spouse’s estate needs to file an estate tax return even if no taxes were due.
However, with the 2020 updates, the total amount that a surviving spouse can transfer tax-free due to portability is now $23.16 million, as opposed to the $22.8 million allowed under the 2019 rules.