If you’re worried about the estate tax, the recent or final tax bill reduces the estate tax. The estate tax exemption has been doubled, helping thousands of American families to avoid this tax. Here’s a look at what’s changing and what’s staying the same.
The New Estate Tax Exemption
Under the old rules, individual taxpayers could pass down $5 million without worrying about the estate tax, and the threshold was double that for married couples. Now, legislators increased the individual exemption to $10 million, and again, couples can pass down twice that much. However, both numbers are pegged to inflation, which means that the actual 2018 threshold is $11.2 million for individuals and $22.4 million for couples.
The Estate Tax Rate
The exemption is the only thing that is changing. The rate stays consistent at 40 percent. To explain, let’s say you’re an individual with an estate worth $15 million and you die in 2018. With the new threshold, there is an exemption of $11.4 million of your assets from the estate tax, but the IRS taxes the remaining $3.6 million at 40 percent. So, your estate faces a $1.44 million tax bill.
Cost-Basis on Inherited Assets
The cost-basis rules also stay the same. This means that all assets passed to your heirs have a cost basis equal to their value on your death. This rule helps you heirs avoid excess capital gains tax if they sell your assets.
To explain, imagine you purchased an asset for $200,000. Then, you made capital improvements worth $30,000. The cost basis of this asset is $230,000. That’s your purchase price plus qualified improvements. If you sell the property for $530,000 in 2018, you face capital gains on $300,000. That’s the sale price minus the cost basis.
In contrast, if you die in 2018 and your heirs take ownership of that asset, the cost basis switches to $500,000 (its current value). If they sell the asset for that amount, they don’t face any capital gains.
The increased exemption means that only 1,800 estates are likely to face the estate tax this year. That’s a decrease of about 3,200 annually compared to the old thresholds. To compare to the past, the exemption was only $675,000 in 2000, and 52,000 estates had to pay this tax.
Changes to the Gift Tax
Unfortunately, the increased threshold is only applicable to 2025. If you don’t plan to die in the next seven years (and hopefully you don’t), you may want to look at other ways to shelter your assets from the estate tax. One of the many options is to give away some of your assets.
As of 2018, the annual exclusion for gifts has increased to $15,000. That means you can give $15,000 to as many individuals as you like, without facing a tax or affecting your lifetime gift tax exemption. If you give over this amount, the value of your gifts directly decreases your estate tax exemption.
State Estate Taxes
If you live in Hawaii, Maine, or Washington D.C., the increased federal threshold also applies to your state estate taxes as of 2018. In Maryland and New York, the exemption rises to these levels in 2019.
In contrast, in Massachusetts and Oregon, the exemption is only $1 million, and you pay state estate tax on anything over that amount. Minnesota, Connecticut, Washington, Vermont, Illinois, and Rhode Island have exemptions between $1 million and the federal threshold.
A handful of other states (Nebraska, Iowa, Kentucky, Maryland, New Jersey, and Pennsylvania) have inheritance taxes, which differ from estate taxes because they’re assessed on the inheritance rather than on the estate. Typically, the rates vary based on the relationship between the deceased and the heir. Cousins, for example, usually pay more inheritance tax than children or grandchildren.
Whether you’re dealing with estate taxes, income taxes, or business taxes, staying on top of these obligations can be difficult. To get help, contact us to get connected with one of our tax resolution specialists.