2018 Annual Gifting and Estate Exemptions

2018 Annual Gifting and Estate Exemptions

The IRS has recently announced some changes coming to the tax code in 2018. Among those changes are two updates to the annual gifting exemption and the estate tax exemption.

The annual gift exemption is the amount of money that any individual person can give to another person each year without reducing their lifetime gift exemption. In 2018, the annual exemption will go from $14,000 to $15,000. Many people utilize this exemption to create a gifting program which systematically reduces their estate over time with the goal of reducing the taxable estate, so this increase means they can increase their gifting program amount by $1,000 per year. Additionally, married couples can elect to “split” gifts, which means they tell the IRS they wish to combine their annual gifting exemptions, meaning that couples who regularly split gifts will be able to gift $30,000 per person per year rather than the current $28,000.

Another implication of the increased gift exemption is the funding of 529 accounts. 529 accounts have a special provision which allows contributions up to 5 times the normal annual limit, assuming the contributor elects to spread the gifts over 5 years. With the updated gifting exemption, the amount that individuals can contribute to 529 plans will go from $70,000 to $75,000, while the amount couples can contribute will go from $140,000 to $150,000. This strategy is a great way to quickly fund a 529 account and take advantage of the tax-free investment returns immediately.

As for the estate tax exemption, in 2018 that amount will rise from $5,490,000 to $5,600,000. While 99.8% of Americans do not have to worry about the estate tax, for the people who do this increase definitely makes a difference. The estate tax rate is a flat 40% of the amount over the exemption, so this $110,000 increase represents a tax savings of $44,000 for people with taxable estates. Each spouse gets this exemption, so if two spouses elect portability (the ability to share their exemption with their spouse) their tax savings could reach $88,000 if their combined taxable estate is greater than $11,200,000.

This increase will likely cause many states to increase their estate tax exemptions to match the federal limit, however, each state is different and the actual changes will vary. For example, in Massachusetts, the estate tax exemption is only $1 million, and the state website notes “future changes to the federal estate tax law will have no impact on the Massachusetts estate tax”.

To read more about these updated tax exemption amounts visit this article in our learning center.
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