The federal estate tax looms large for people that have been very successful from a financial perspective because it carries a 40 percent rate. It is only a factor for wealthy individuals because there is a credit or exclusion that is quite high at the present time.
This figure represents the amount that can be transferred before the estate tax would potentially be levied on the portion of an estate that exceeds the exclusion. After the exclusion amount has been set via legislative mandate, it is indexed annually to account for inflation, and an adjustment has been announced.
2022 Federal Estate Tax Exclusion
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 establish a $5 million exclusion for 2011. This figure was retained with ongoing inflation adjustments through 2017, but there was a big change at the end of the year.
When the Tax Cuts and Jobs Act was enacted, a provision was included that increased the estate tax exclusion. It went up to $11.18 million in 2018, and it has been indexed for inflation since that time. In 2021, the exclusion has been $11.7 million.
There has been more inflation this year than we have seen over recent years, and it will result in a $12.06 million exclusion next year. We should point out the fact that the exclusion is portable, so a surviving spouse may use the exclusion that was earmarked for their deceased spouse.
The unlimited marital deduction can be used to transfer any amount of property to your spouse in a tax-free manner. However, this deduction is not available to noncitizen spouses.
Addressing the impact of the estate tax would be easy if you could give all of your assets to your children shortly before you pass away, but the gift tax closes the loophole. It has been unified with the estate tax since the 1970s, so the $12.06 million exclusion that we will have next year applies to your estate and gifts that you give while you are living.
That’s the bad news, but the good news is that you can give some lifetime gifts tax-free without using any of your unified exclusion. There is an annual exclusion that gives you the ability to transfer a certain amount to any number of people free of taxation.
It has been $15,000 per person since 2018, but the IRS has announced it is going to go up to $16,000 in 2022.
In addition to this annual exclusion, there is an educational exclusion. You can pay school tuition for students without incurring any gift tax liability. The institution must be paid directly, and the exclusion does not cover books, fees, room and board, and other living expenses.
You could use the $16,000 annual exclusion to provide extra money to cover some of the other expenses. Plus, if you are married, you and your spouse could combine your respective exclusions to give up to $32,000 each year to students or anyone else that you choose.
There is a medical exemption as well, so you can pay health care bills for others without being taxed. This exclusion applies to services rendered, and you can use it to pay health care insurance bills for others.
Vermont State Estate Tax
Vermont is one of a dozen states with its own state-level estate tax, and there is an estate tax in Washington, D.C. The exclusion in Vermont has been $5 million in 2021, and there has not been any news about an exclusion increase next year.
We Are Here to Help!
If you are exposed to either or both of these estate taxes, there are strategies that can be implemented to ease the burden. And of course, even if taxation is not going to be a source of concern, we can help you develop a plan that is ideal for you and your family.
You can schedule a consultation at our estate planning office in Essex Junction, VT if you call us at 802-879-7133. There is also a contact form on this site you can use to send us a message and if you reach out electronically, we will get back in touch with you promptly.