Increase in 2020 Applicable Exclusion Amount

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INCREASE IN 2020 APPLICABLE EXCLUSION AMOUNT – ESTATE TAX

 

The Internal Revenue Service (IRS) just announced that the estate and gift tax exemption for 2020 is increasing to $11.58 million per person — up from $11.40 million in 2019.

 

If you are like most people, you are probably asking, “What does that actually mean?”

 

What is the Estate & Gift Tax Exemption?

 

The estate tax is a federal tax imposed on estates over a certain value. That “certain value” is known as the “estate tax exemption” or “combined estate and gift tax exemption” or “unified credit” or a dozen other names.

 

The main thing to know is this: if an estate is worth more than the estate tax exemption amount, the value over the exemption will be taxed. If the estate is worth less than the exemption amount, no tax liability.

 

So the increase announced yesterday by the IRS means that if an estate is created (i.e., if a person dies) in 2020, there will be no estate tax imposed if the estate is worth less than $11.58 million. And thanks to estate tax portability, a married couple can now shield double that amount, $23.16 million, from estate taxes in 2020.

 

Keep in mind that, similar to income taxes, there are a variety of estate tax deductions that “decrease” the value of an estate for the purpose of determining estate tax liability. So people can effectively shield millions more by carefully planning their estates.

 

The IRS also confirmed that the annual gift tax exclusion amount for 2020 remains at $15,000 per individual per year, unchanged since 2018. This means you can give $15,000 to as many people you want (me, for instance) each year without filing a gift tax return.

 

How Do Estate Taxes Affect Me?

 

As far as problems go, being worried about estate taxes is a pretty good problem to have because it means you have a ton of money. It’s like Shakespeare once said, “Mo’ money, mo’ problems.”

 

In 2017, when the estate tax exemption was $5.49 million per person ($10.98 million per couple), only about 0.2% of estates had to pay estate taxes. That’s approximately 2 estates out of every 1,000.

 

However, the Trump Tax Cuts doubled the estate tax exemption to $11.18 million per person ($22.36 million per couple) in 2018. While there is not yet precise data, projections indicate that less than 0.1% (one-tenth of one percent) of estates will end up having to pay federal estate taxes under the Trump Tax Cuts.

 

That’s less than 1 estate out of every 1,000.

 

To put that in perspective, approximately 2.7 million people died in 2018 — but less than 2,000 estates had to pay taxes. The estate tax only affects the wealthiest of the wealthy. 99.9% of Americans do not currently need to worry about federal estate taxes.

 

But the key word is “currently.” Tax policy changes all the time. A number of 2020 presidential candidates have proposed reducing the estate tax exemption. Yet even the most aggressive of these plans proposes lowering the exemption only to $3.5 million per person ($7.0 million per couple). Even the Trump Tax Cuts are scheduled to have the exemption revert back to $5 million (adjusted for inflation) after 2025, if Congress does not change the law. 

 

In any case, if your net worth is under $3.5 million, none of the estate tax proposals currently being discussed would affect you. You are safe for now.