Important Things to Understand Regarding Estate and Gift Taxes

Peacock & French CPAs
Mar 01, 2021

When planning for your estate, many people are concerned about how much their beneficiaries will lose to taxes when they pass away. This article will give you a look at the current estate tax limits and gift tax laws.

When planning for your estate, many people are concerned about how much their beneficiaries will lose to taxes when they pass away. The good news is that most Americans’ estates will not be taxed upon their passing, as the threshold for taxing an estate is quite high. However, it is still important to understand current estate tax laws, as well as how to best utilize tax-free gifts to manage your estate value while living. This article will give you a look at the current estate tax limits and gift tax laws.

Exemption Amounts and Portability

The exemption amounts for estate taxes change every year based on new tax laws as well as inflation, so it’s important to stay informed of these changes to better manage your estate. For those filing a return involving an estate passed on in 2020, the exemption amounts are as follows:

  • $11.58 million exempt for an individual
  • $23.16 million exempt for a married couple

If the estate value exceeded these amounts, only the value over the exemption limit will be taxed.

Now, you might be wondering how the individual and couple amounts apply after one spouse passes away. When the second spouse passes, does the individual limit or couple limit apply to the estate? The answer might be a bit more complicated than you think.

As a married couple, your estate can be passed on to your beneficiaries with double the exemption amount—but that doesn’t happen automatically. You must designate that you intend to use the doubled exemption amount as a couple when the first spouse passes away. This is called portability, and it’s essential that this is done correctly. Failing to enact portability will mean that only the individual exemption limit applies when the second spouse passes. This can result in a large and unexpected tax bill for the couple’s beneficiaries.

What Are Gift Tax Credits?

Now, let’s discuss what gift tax credits are and how they can be an important part of avoiding future estate taxes for large estates. If estate taxes are a concern, making use of annual gift exclusions is an excellent way to pass your assets on to your beneficiaries, rather than having the federal government taking a portion of it later.

The annual gift exclusion is $15,000 per person. This means that you can gift $15,000 to each of your children without having taxes taken out of the gift amount. And, if you’re married, that limit applies to both of you; this means that you can each provide separate gifts of $15,000 to your children every year. If you have three children, this means excluding $90,000 of your estate each year, all tax-free.

Estate Taxes from Your State

It’s important to be aware that estate tax laws and rates vary by state too. Some states have abolished estate taxes altogether. Others have estate taxes that mirror federal estate tax laws; this means that if you don’t owe federal taxes on an estate, you won’t owe state taxes on it either. However, there are several states that have lower exemption limits (often significantly lower) than the federal limits. Those states are:

  • Connecticut
  • District of Columbia
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

If you are a legal resident of any of these states, it’s essential that you come to understand your state’s individual estate tax laws as well as the federal ones to better determine what portion of your estate may be subject to tax.

When an Estate or Gift Tax Return Is Needed

So, if you’re handling an estate of someone who has passed, do you need to file a tax return for the estate? If the fair market value of the decedent’s assets (plus any prior gifts that would be considered taxable) do not exceed the current exemption amount, you do not need to file an estate tax return. However, if the estate is being transferred to a surviving spouse, you must file an estate tax return to enact portability, as mentioned previously, regardless of the estate’s value.

In terms of gifts, amounts under $15,000 do not require a gift tax return. If you’ve given a gift to a trust, it’s important to know whether or not the trust you’re gifting to qualifies for such treatment; if not, a gift tax return will be required, regardless of the amount. If you and your spouse gave a gift amount of $30,000 to double your gift tax exclusion, you must file a gift tax return to “gift split” (agree that the gift amount was intended as a gift from both of you) to utilize that exclusion treatment as a couple.

If you have questions about your estate taxes or gift taxes, please reach out to one of our qualified and experienced CPAs today.