IRS Increases 2017 Estate and Gift Tax Limits

Good news for wealthy taxpayers who seek to avoid the 40% federal estate tax: The IRS has announced an increase in the estate and gift tax exemption for 2017, to $5.49 million per individual, up from $5.45 million in 2016.

What this means is that an individual is now entitled to leave $5.49 million to his/her heirs and avoid paying federal estate or gift tax. For example, if you established a $5 million children’s trust in years past, you now have the ability to add to it up to the $5.49 million amount. For married couples, they can now protect nearly $11 million – $10.98 million, to be exact – of their estate from federal estate and gift taxes.

In an effort to pare their estates down and thus keep the total value below the threshold, many individuals and couples utilize every last penny of exemption that is available to them. In that regard, this increase now gives people an extra $80,000 to work with.

The federal estate and gift tax exemptions rise with inflation. Moreover, the federal gift tax is tied to the estate tax. Therefore, inflation indexing helps wealthy individuals and couples maximize tax-free lifetime giving. While gifts can be made during one’s lifetime, they count against the estate tax exemption amount, so the person making the gift must keep accurate records of such gifts.

Additionally, a federal “kiddie” tax applies when making gifts to children and grandchildren through age 23. This tax places investment income in excess of small amounts into the parents’ tax bracket. In 2017, a child will pay no tax on the first $1,050 of unearned income. Just as in 2016, a 10% rate will then apply to the next $1,050.

Also keep in mind that the $10.98 million figure for couples can be misleading. A husband and wife are each entitled to their own exemption, which means that, assuming they haven’t made prior lifetime gifts, they can give away a total of $10.98 million tax-free in 2017. Yet that is not automatic. By the rules of an unlimited marital deduction, you may leave all of your assets – or a portion of them – to your surviving spouse with no associated federal estate tax burden. But to be able to use your late spouse’s unused exemption, you must specifically elect it on the estate tax return of the first spouse to die—even when no tax is due. If you aren’t aware of this, you may face an unexpected federal estate tax bill.

In related news, the IRS kept the current annual gift exclusion limit at $14,000 for 2017, which is where it’s been since 2014. This means that individuals can gift 14,000 to as many other individuals as they please. Moreover, a husband and wife can each make $14,000 gifts. These annual exclusion gifts do not count toward the lifetime gift exemption.

Finally, the federal estate tax’s ultimate fate remains uncertain, even in the wake of President-elect Donald Trump’s historic victory on November 8. Trump has proposed repealing it and imposing a brand-new carryover basis regime for estates in excess of $10 million.

We will continue to monitor the latest developments surrounding the estate and gift tax and keep you updated as news breaks.

For more information about estate and gift tax issues or other tax matters, check out our online tax guide, or contact Mark Abrams at 404-874-6244.