The Internal Revenue Service and the Treasury Department proposed regulations on Wednesday to allow individuals making large gifts between 2018 and 2025 to do so without worrying that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.
The proposed regulations, which implement changes made by the tax overhaul enacted in 2017, address the effect of the tax law’s changes to the basic exclusion amount used in computing federal gift and estate taxes.
The tax law temporarily increased the BEA from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation, the IRS explains.
For 2018, the inflation-adjusted BEA is $11.18 million. In 2026, the BEA will revert to the 2017 level of $5 million as adjusted for inflation.
The proposed regs will affect donors of gifts made after 2017 and the estates of those who die after 2017.
The proposal will be out for a 90-day comment period after being filed in the Federal Register.
Individuals will be allowed to take advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 without being adversely impacted after 2025, when the exclusion amount is scheduled to drop to pre-2018 levels.
The IRS explains that gift and estate taxes are calculated using a unified rate schedule, on taxable transfers of money, property and other assets.
Any tax due is determined after applying a credit — formerly known as the unified credit — based on an applicable exclusion amount.
The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute, and other elements (if applicable) described in the proposed regulations.
The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.
“To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regs provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death,” the IRS said.
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