Some Clarification on the Temporary Gift Tax Break

One of the odder portions of The Tax Cuts and Jobs Act temporarily doubled the federal gift and estate tax exemption through 2025. When adjusted for inflation, this exemption allows individuals to transfer up to $11.7 million in 2021 without paying any federal gift or estate tax (up from $11.58 million in 2020). Married couples can shield up to $23.4 million from those taxes in 2021.

This sizable exemption creates an attractive opportunity to minimize taxes on your wealth by giving business interests or other assets to family members now before they drop to their previous levels of $5 million and $10 million, respectively (adjusted for inflation) on January 1, 2026.

Some affluent families, however, have been reluctant to take advantage of this opportunity for fear of a “clawback.” In other words, their concern is that if the exemption amount is lower when they die, a portion of their pre-2026 gifts may be clawed back and subject to estate taxes.

Although Congress didn’t appear to intend such a result, a literal reading of the tax code suggested that previous gifts could be added back into one’s estate and subject to tax based on the exemption amount in the year of death. Fortunately, IRS regulations finalized in November 2019 provide assurances that this won’t happen.

If you have questions about how to take advantage of this temporary gift and estate tax exemption, definitely reach out to us so we can help you plan and ensure that as much money as possible goes to your loved ones rather than Uncle Sam.

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