Around this time every year, the IRS looks at whether there has been a year-over-year increase in the Consumer Price Index and announces inflation adjustments to the federal gift and estate tax exclusion amounts for the following calendar year. In the midst of all the talk in Washington D.C. about tax reform and speculation about the fate of the estate tax, the IRS has just announced the gift and estate tax exclusion amounts for 2018. In general, these exclusion amounts tell a U.S. citizen or resident how much he or she can give away without incurring gift and/or estate tax on the transfer. Individuals and couples make use of these amounts, both during lifetime and at death, to transfer wealth to family and friends on a tax-free basis. When the amounts go up, as they are scheduled to do next year, it presents an opportunity to increase the tax-free giving.
Here are the specifics on what next year will bring for the following federal estate and gift tax exclusion amounts if the transfer tax rules remain unchanged:
- Annual exclusion for lifetime gifts. The “annual exclusion” is the amount an individual is allowed to exclude from his or her total taxable gifts in a calendar year for gifts of present interests to any one recipient during that year. This is the figure that tends to come up in conversation most often, because many individuals and couples have a practice of making annual-exclusion gifts to children and grandchildren. After years of holding firm at $14,000, this exclusion is finally increasing next year by $1,000. This means that in 2018 the first $15,000 of gifts of present interests to any one person will not be included in the total amount of a taxpayer’s taxable gifts for that year. (Remember taxpayers can make tax-free transfers for qualifying educational or medical expenses, in addition to annual exclusion gifts.)
- Special annual exclusion for lifetime gifts. There is also a special annual exclusion for gifts to a non-citizen spouse. In 2018, the first $152,000 of gifts of present interests to a spouse who is not a citizen of the United States will not be included in the total amount of a taxpayer’s taxable gifts. This is up from 2017’s exclusion of $149,000.
- Applicable exclusion for unified credit against estate tax. This applicable exclusion is the combined amount an individual who is a U.S. citizen or resident can transfer over lifetime and/or at death that is excluded from gift tax and/or estate tax. For determining the amount of the unified credit against estate tax for an estate of any decedent dying in 2018, the applicable exclusion amount will be $5,600,000. This represents an increase over the 2017 amount, which now stands at $5,490,000.
For certain taxpayers, it can make good sense – all other things being equal – to take advantage of the opportunities presented by these increased exclusion amounts to transfer assets to loved ones without paying gift or estate tax on the transfer. Yet, with the prospect of changes to the gift and/or estate tax laws in the coming months (or year), many taxpayers will be looking to Congress and the White House for clearer signals and consulting their own advisors before deciding that particular lifetime gifts still make sense.
- Editor in Chief, Co-Chair, Nonprofit and Social Impact practice group
- Chair, Tax Department and Co-Chair, Nonprofit and Social Impact practice group