On October 19th, the IRS published inflation-adjusted amounts for various tax rate schedules, including estate and gift tax exemptions, to be effective in 2018. Below is a summary of some key points.
Estate, gift and generation-skipping transfer (GST) tax exemptions
The basic exclusion amount that protects gifts and bequests from federal gift and estate tax is increased to $5,600,000 in 2018 (from the 2017 amount of $5,490,000). A married couple will therefore have a cumulative basic exclusion amount of $11,200,000 in 2018.
The GST tax exemption protects gifts and bequests to grandchildren and more remote descendants from the separate GST tax, and is equal to the gift and estate tax exemption amount of $5,600,000 per individual, or $11,200,000 for a married couple.
Annual exclusion for gifts
For calendar year 2018, the annual exclusion amount – that is, the amount that an individual can gift to any other person – will increase to $15,000 per donee, or $30,000 if the donor is married and the donor’s spouse agrees to gift-splitting. The value of any gifts made within the annual exclusion amount will not reduce the taxpayer’s basic exclusion amount from federal gift and estate taxes.
Annual exclusion for gifts to foreign spouse
The unlimited gift tax marital deduction is disallowed if the spouse of the donor is not a citizen of the US at the time of the gift. Instead, there is allowed an annual exclusion that is indexed for inflation and has been set at $152,000 for 2018.
Expatriation to avoid tax
A US citizen or long-term US resident individual expatriating on or after June 17, 2008 will be deemed a “covered expatriate” if any one of three conditions under IRC § 877(a)(2) are met, one of which is a net income test. For calendar year 2018, an individual is a covered expatriate if the individual’s “average annual net income tax” for the five taxable years ending before the expatriation date is more than $165,000.
Tax responsibilities of expatriation
For a “covered expatriate”, IRC § 877A imposes a mark-to-market tax regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. For taxable years beginning in 2018, the amount that would be includible in the gross income of a covered expatriate is reduced (but not below zero) by $713,000.
Clients should consider making annual exclusion and charitable gifts before the end of calendar year 2017. Please reach out to us if you have any questions on year-end gift planning.