Estate Taxes

If you haven’t discussed estate planning opportunities with your legal, tax, and financial professionals yet, now is a good time. Even with more generous federal estate tax exemptions, taxpayers need to be aware of local estate and inheritance taxes. Although some states have repealed their estate tax statutes and others increased their exemptions recently, a few still have the tax. A handful of states also have an inheritance tax.

TRANSFER TAXES

The total amount that a U.S. citizen or resident can transfer to another individual free of estate, gift, or Generation-Skipping Transfer (GST) taxes (collectively, the "transfer taxes") has increased to $12.06 million for individuals in 2022, up from $11.7 million in 2021. Married couples filing jointly qualify for $24.12 million in 2022, up from $23.4 million in 2021. (Subject to an annual adjustment for inflation).

EXEMPTION PORTABILITY

If part (or all) of one spouses' estate tax exemption is unused at that spouse's death, the estate can elect to permit the surviving spouse to use the deceased spouse's remaining exemption. This exemption "portability" provides flexibility at the first spouse's death, but it has some limits. Be aware that portability is available only from the most recently deceased spouse, doesn't apply to the GST tax exemption and isn't recognized by many states.

GIFT TAXES

The annual gift tax exemption increased to $16,000 per donor for each recipient in 2022, up from $15,000 in 2021. If, for example, you and your spouse each max out your annual gift exemption to three grandchildren, you will avoid gift tax and preserve your entire estate tax exemption. Be sure you use your annual exemption by December 31, because it doesn't carry over from year to year.

Paying for someone else's tuition or medical bill is an exception to the gift tax if you do it correctly. Payments made directly to providers or schools aren't considered gifts.

STEP UP IN BASIS

A new fair market value is established for assets received after a donor's death--a step up in basis--but there is no step up in basis for gifts received during a donor's life. The step-up in basis sets a new starting value for inherited assets, which can make a big difference if the assets have appreciated significantly, while making it less likely to trigger the favorable capital gains tax.