In this life, there are two guarantees: death and taxes. Yet, even in death, one does not escape the imposition of tax.[i] Since 1916, Congress imposed an excise tax on transfers of a decedent’s taxable estate. Today, Americans are confronted with the latest interpretations of such excise taxes, courtesy of the 2017 Tax Cuts and Jobs Act (TCJA). For the first time in our nation’s history, the TCJA put an effective pause in our tax code, suspending certain provisions while permitting inflation adjustments to run their course. One benefit of the TCJA has been the significant increase in the Unified Credit Against Estate Tax exemption (“unified credit”).[ii] As hyperinflation lingers within the U.S. economy, many taxpayers have enjoyed the benefit of the inflated exemption amount thereby excluding themselves from the excise taxes. However, as the sunset of TCJA quickly approaches, many raise questions as to what happens next.
Under current legislation, the unified credit is the applicable exclusion or exemption amount for any excise taxes owed to one’s estate. The unified credit offsets estate and gift taxes based on the applicable estate and gift tax rates for specific transfers. Initially established at $5 million in 2011, the unified credit exemption amount is adjusted for inflation in subsequent years and more visibly during the lifetime of the TCJA. As of 2023, the applicable exclusion amount currently sits at $12,920,000 for single filers and $25,840,000 for married couples. This suggests that if a married couple had assets of less than the threshold amount ($25,840,000), then the married couple would not be subject to the estate or gift tax for any property that the married couple would gift during their life or transfer at death.[iii]
The unified credit has been a handy tool for tax planners and estate planners alike as many Americans found the credit to be well below the threshold amount.[iv] American families can avoid estate taxes on inherited property and benefit from a “step-up” in the property’s basis, preventing them from paying income taxes on any appreciated gains since the original purchase by the deceased owner.[v] In fact, statistics show that estate tax filings, known as Form 706, have been cut by more than half since 2010.[vi] This statistic is projected to fall even more as the sunset of the TCJA approaches.
However, this unique pause, established by the TCJA, ends at the start of 2026. With that in mind, if no legislative action is taken to extend the TCJA’s effects, the exemption amount will be cut roughly in half for the 2026 tax year.[vii] Adversely, more American families will be subject to the estate and gift taxes if such families transfer assets over the new exemption amount of $6.2 million for single filers and $12.4 million for married couples. Moreover, many estates would incur marginally higher taxes based on the imposition of newly inflated rates proposed by the current Administration.[viii]
Luckily, the Internal Revenue Service has offered some incentive on the matter by preventing any clawback on a taxpayer’s lifetime gifts made during the increased exemption period of the TCJA.[ix] Therefore, if a taxpayer is planning to make a gift, the regulation allows you to benefit from the increased exemption amounts available if the gift is made during the period of the higher exemption amount. However, with such incentives, taxpayers need to be ready for what is to come and have a tax planning strategy in place prior to the end of the TCJA, as these anti-clawback provisions are only available for a limited time.
The 2017 Tax Cuts and Jobs Act introduced a unique pause in our tax code’s history. The significant increase in the Unified Credit Against Estate Tax has provided a valuable tool for many taxpayers and planners, substantially reducing estate tax filings. However, this pause is set to end in 2026 unless legislative action is taken to extend its effects, potentially halving the exemption amount and subjecting more American families to marginally higher estate and gift taxes. Congress should push to extend this provision of the TCJA to become indefinite within the tax code. We can ensure the provision’s continuation by consistently lobbying both houses of Congress and highlighting the benefits of the current unified credit status to the American people. The only question remains whether the legislature will act to extend the benefits currently found in this code provision or let it revert to its pre-TCJA days. The answer remains unclear. Therefore, taxpayers must stay informed and plan accordingly to make the best of the current tax environment.
[i] See I.R.C. § 2001(a) (“A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.”).
[ii] See I.R.C. § 2010(c)(3)(C) (“In the case of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting “$10,000,000” for “$5,000,000”); see also Rev. Proc. 2022-38 (providing that the Unified Credit Against Estate Tax would increase to a total of $12,920,000 per person for Tax Year 2023).
[iii] See I.R.C. § 2505(a)(2) (specifying that the applicable credit amount for gifts made during life is also taken into consideration when calculating the remainder of the applicable credit amount under § 2010(c)).
[iv] See The Fed. Reserve, Survey of Consumer Finances, 1989 – 2019, (Nov. 4, 2021), https://www.federalreserve.gov/econres/scf/dataviz/scf/table/#series:Assets;demographic:all;population:all;units:median (comparing the median of Assets held by all families from the periods of 1989 through 2019).
[v] See I.R.C. § 1014(a)(1) (“[T]he basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be the fair market value of the property at the date of the decedent’s death.”).
[vi] See Publication 5332 (Rev. 2-2021), (Mar. 1, 2021), https://www.irs.gov/pub/irs-pdf/p5332.pdf (referencing that the number of estate tax returns filed declined just under 60 percent, from 15,191 in 2010 to 6,409 in 2019, primarily due to the increase in the filing threshold).
[vii] See Martin Schamis, These Tax Cuts and Jobs Act Provisions May Sunset Soon, CPA Practice Advisor, (June 16, 2023), https://www.cpapracticeadvisor.com/2023/06/16/take-advantage-of-the-tax-cuts-and-jobs-act-provisions-before-they-sunset/81130/ (“If no legislative action is taken . . . that historically high exemption amount will be cut in half for the 2026 tax year.”).
[viii] See Office of Management, Budget Of The U.S. Government, The White House, 157 (2023), https://www.whitehouse.gov/wp-content/uploads/2023/03/budget_fy2024.pdf (proposing to modify the tax rules for estate and gift taxes and revise rules for valuation of certain property).
[ix] See Trea. Reg. § 20.2010-1(c) (“Changes in the basic exclusion amount that occur between the date of a donor’s gift and the date of the donor’s death may cause the basic exclusion amount allowable on the date of a gift to exceed that allowable on the date of death.”); see also Trea. Reg. § 20.2010-1(c)(2)(i) (providing an example that if a $9 million gift occurred when the basic exclusion amount was $11.4 million, but later dropped to $6.8 million at the person’s death, the $9 million gift would remain fully excluded for gift tax purposes).
