Each year, there are potential changes to the estate tax and gift tax exclusions to account for inflation. There have been increases in the estate tax exclusion over recent years, but the annual gift tax exclusion has been $15,000 a person since 2018.
The Internal Revenue Service has released updates for 2022, and we will share the information in this post.
2022 Federal Estate Tax Exclusion
A $5 million estate tax exclusion was set for 2011, and it remained in place indexed for inflation through 2017. In December of that year, the Tax Cuts and Jobs Act was passed, and it included a major change to the estate tax exclusion.
After a series of adjustments, it was $5.49 million in 2017, and it was raised to $11.18 million for the following year. It has been indexed for inflation annually since that time, and it has been $12.06 million this year.
In 2022, the exclusion is going up to $12.09 million, and the rate will remain unchanged at 40 percent. There is no estate tax on transfers between spouses because there is an unlimited marital deduction.
Plus, a surviving spouse can utilize the unused portion of the exclusion that was due to their deceased spouse. This is called portability, and it was established when The Tax Relief, Unemployment, Insurance Reauthorization, and Job Creation Act of 2010 was enacted.
Federal Gift Tax
There is a gift tax to stop people from giving large gifts to avoid the estate tax. The multimillion-dollar exclusion that we have looked at is a unified exclusion that applies to lifetime gifts and your estate.
This being stated, there is another annual gift tax exclusion that gives you the ability to transfer assets to others without incurring any gift tax exposure. It is going up to $16,000 when the new year rolls around.
To be clear, you can give as much as $16,000 to any number of people in a calendar year tax-free without using any of your unified exclusion.
Timely Action Is Required
The provision in the Tax Cuts and Jobs Act that increased the exclusion is not permanent. As the laws stand at this time, the provision is going to sunset at the end of 2025. In 2026, it will revert back to the 2017 exclusion level with inflation adjustments.
It will essentially be cut in half, but there is some time between now and then to utilize the record high exclusion. You can give direct lifetime gifts if you choose to do so, and this exclusion can be used to fund certain types of trusts.
State Level Estate Taxes
There are a total of 12 states that still have state-level estate taxes that are separate from the federal tax. We do not have this type of tax in Ohio, but you are not necessarily immune from a state-level estate tax.
If you own property in a state with an estate tax, its transfer to your estate would be subject to the state-level estate tax. Of course, this would be the case at its value exceeds the exclusion in the state where it is located.
The state-level exclusions are much lower than federal exclusion in some states. There is an estate tax in Massachusetts with a $1 million exclusion, and Oregon has the same level.
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