The lifetime gift exclusion will soon go down from about $12,000,000 to $6,000,000. This means I can gift $12,000,000 to someone today, and pay no tax. What if I give $8,000,000 today, would I have any leftover limit to give more after the exclusion goes down? Is it proportional? Or will I have to stop at the $8,000,000 I gave before the reduction in limit?
On November 26, 2019, the IRS clarified that individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. The IRS formally made this clarification in final regulations released that day. The regulations implement changes made by the Tax Cuts and Jobs Act (TCJA), tax reform legislation enacted in December 2017.
The regulations provide a special rule that effectively allows the estate to compute its estate tax credit using the greater of the BEA applicable to gifts made during life, or the BEA applicable on the date of death. As a result, people planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases.
A. Here’s an example. Before 2018, A had never made a taxable gift. In 2018 when the BEA is $11.18 million, A makes a taxable gift of $9 million. A uses $9 million of the available BEA to reduce the gift tax to zero. A dies in 2026. Even if the BEA is lower that year, A’s estate can still base its estate tax calculation on the higher $9 million of BEA that was used in 2018.
For more information about this and other TCJA provisions, visit IRS.gov/taxreform.
For 2024, the lifetime exemption is $13.61 million.
If you hit that limit this year, then when the exemption drops you would clearly be done and any further gifts that exceeded the annual exclusion would be subject to being taxed.
If you gave $8 million this year (and that was your lifetime total), then you would also be done if the exemption dropped below that figure in the future. However, note that if the exemption dropped to $6 million, the IRS will not try to claw back the $2 million (i.e., $8 million minus $6 million) and they have already made that point clear.
Thank you! Great info!
So just to make sure I understand it right, if I give $9,000,000 today I will not be able to exclude a single dollar from my estate later (assuming proposed rates). Even though the limit is $12,000,000 today and I could have given $3,000,000 more. These $3,000,000 are forfeited. Do I read it right?
@000000000000 wrote:
.....These $3,000,000 are forfeited. Do I read it right?
Yes, assuming the exemption decreases as expected.
Another thought; If you, in fact, have sums this large to gift, you really do need to consult with legal counsel, a financial advisor, and a tax professional. Those who have a net worth of such magnitude (as like in the $20 million and up range) typically look into setting up a private foundation.