IRS Announces Higher Estate and Gift Tax Limits for 2020
In recent years, many people have put estate and gift tax concerns out of their minds since the Obama Administration increased the estate tax credit to more than $5 million in the early 2010s. The Tax Cuts and Jobs Act of 2017 again substantially increased the estate and gift tax credit, protecting most estates in the U.S. However, many people may not realize the true net worth of their estate and that the estate tax could affect them. Others may come upon a windfall that suddenly makes estate and gift taxes a very real concern. In any event, you should still stay informed regarding the estate and gift tax credits as they change each year.
2020 Tax Credits
Each year, the Internal Revenue Service (IRS) announces new tax credits and limits based on changed laws and/or inflation. For 2020, the exempt amounts for estate and gift taxes are as follows:
- $11.58 million exempt per individual (it was $11.18 million in 2018)
- $23.16 million exempt per married couple
- $15,000 annual gift exclusion amount
This means that if someone passes away, they can pass on up to $11.58 million to their beneficiaries without the assets being subject to the federal estate tax. It also means that people can gift up to $15,000 to each of their children each year without paying gift taxes.
For many people, having an estate worth $11.58 million or $23.16 million between spouses is a goal. If you are working toward that goal, know that it is important to plan ahead in anticipation of achieving the financial success you want for you and your beneficiaries. If you already have an high-worth estate, you need to ensure you put all necessary protections in place right away. Do not assume these tax credits will last forever, so be prepared for future changes. As of now, the tax law is set to expire in 2025, and we will watch carefully for any new developments before then.
Estate and Gift Tax Credits for Married Couples
As a married couple, you can enjoy double the exemption as an individual. However, this is not an automatic occurrence. You must designate that you plan to use the doubled exemption when the first spouse passes away, even if they leave the estate tax-free to the surviving spouse. Then, the doubled exemption will apply to the entire estate when the second spouse passes away. This is called “portability,” and must be done correctly to prevent unexpected tax liability.
The last thing you ever want is a surprise federal estate tax bill, as the rate can be as high as 40 percent of your taxable estate. If you have a $20 million estate and neglect to correctly use the doubled exemption for married couples, your estate could face a tax of more than $3.4 million, which will go to the IRS instead of your beneficiaries.
If estate taxes may be a concern, know that married couples can also double the annual gift exclusion of $15,000. This means if you have five children, you can each give $15,000 to each child tax-free, exempting $150,000 annually from your estate. You can also make these gifts to persons other than your children. Any gifts in excess of this exclusion will count against your overall estate tax exemption.
State Estate Taxes
In addition to the federal tax credits announced by the IRS, it is important to pay attention to state tax laws. Several states have abolished estate taxes altogether, and many states tie their exemptions to federal law. This means if you will not owe federal estate taxes, you do not have to worry about state taxes. However, there are numerous states including New York that set their own exemption limits that are significantly lower than the federal limits, as follows (2019 levels):
- Connecticut = $3,600,000 exemption
- District of Columbia (DC) = $5,681,760 exemption
- Hawaii = $5,490,000 exemption
- Illinois = $4,000,000 exemption
- Maine = $5,700,000 exemption
- Maryland = $5,000,000 exemption
- Massachusetts = $1,000,000 exemption
- Minnesota = $2,700,000 exemption
- New York = $5,850,000 exemption (2020)
- Oregon = $1,000,000 exemption
- Rhode Island = $1,561,719 exemption
- Vermont = $2,750,000 exemption
- Washington = $2,193,000 exemption
For example, if you live in New York and have an estate worth $10.5 million, you would not have to worry about federal estate tax liability if you passed away in 2020. However, New York declined to follow the Tax Cuts and Jobs Act increase of the estate tax credit, and the state set its own exemption amount of $5,850,000 for 2020. This will not cover your $10.5 million estate, which will be subject to New York estate taxes.
New York also has complex estate tax laws, which include a “cliff” for taxable estates. Generally speaking, if your taxable amount is over five percent of the exemption, your entire estate can be taxable and you cannot use the exemption. If this sounds confusing, it is because it is confusing for many people. Consider the following:
- You have an estate worth $10,500,000
- The non-exempt amount is more than five percent of the $5,850,000 exemption
- Therefore, your entire estate can be taxable
- New York taxes estate amounts over $10,100,000 at the maximum rate of 16 percent
- Your estate may be taxed $1,680,080 by New York State
As you can see, even if the federal estate tax is not a concern, state taxes might be a very real concern.
Consult Our New York Elder Law Attorneys
The good news is there are many steps you can take to plan in regard to estate taxes. If you have a high-worth estate, you should discuss your legal options with an experienced New York elder law lawyer about your detailed estate plan. The law office of Goldfarb Abrandt & Salzman LLP helps clients with all types of estates of all different values. We know how to identify and address your many possible concerns, including estate tax planning. Contact us online or call (212) 387-8400 to schedule your consultation.
