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In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), representing the most sweeping tax reforms since the 1980s. The new laws impact virtually every corner of the tax world, including the taxation of individuals and corporations. Compared with the scale of changes that affect income and corporate tax, the additions to estate tax were small and impact less than 0.1 percent of the population. However, tax professionals may encounter new tax code regulations as they assist their clients during the estate planning process.
Through the fully online master’s in taxation program from Northeastern University, experienced tax professionals can refresh their knowledge and develop a deeper understanding of how the TCJA may have affected their clients. First, let’s examine an overview of estate and gift tax issues of the U.S. tax system.
How are estate transfers taxed?
The estate tax impacts an individual’s right to transfer property upon his or her death. Typically, a gross estate value is utilized to determine the portion of the estate that is taxable. A gross estate is the total value of the properties owned by an individual at the time of death. These properties include cash, securities, insurance, real estate, annuities, trusts, business interests, and other miscellaneous assets. Importantly, the gross estate is calculated based on the value of these properties when their owner dies—not by how much was paid for them or their original worth.
A taxable estate is the portion of the gross estate minus exemptions and deductions such as debts, mortgages, estate administration expenses, qualified charitable expenses, and property passed to a living spouse. Generally, a significant portion of an estate is exempt from tax. The amount of this exemption is determined by the tax code, and has shifted greatly over the years.
How are gifts taxed?
A gift tax is placed on the transfer of property by one person to another with no expectation of reciprocation. Likewise, gift tax may apply when someone transfers their property to another person for less than its full value. Generally, the gift tax is paid by the donor, though the recipient may agree to pay the tax in special circumstances. Some transfers of property are excluded from the gift tax, including gifts made to a spouse, political donations, and educational and medical expenses. When an individual dies, an experienced tax professional or accountant is often required to determine when the gift tax applies to the transfer of property from an estate.
How did the TCJA impact estate and gift taxes?
Effective Jan. 1, 2018, the TCJA increased the estate tax exclusion from $5,450,000 to $11,400,000. The exemption for married couples is $22,800,000. This expanded exemption has a sunset provision, which means it will revert back to the 2017 exclusion amount in 2026. In the meantime, the new exemption rate decreases the number of estates impacted by this tax from 5,000 to approximately 2,000.
Importantly, the estate tax exemption is portable. Individuals can transfer the unused portion of their exemption to a spouse. For example, if an individual’s estate is worth $5 million, he or she could give $6.4 million of the exemption to his or her spouse. This allows the spouse to pass on the property to heirs debt free. It should be noted that, although an estate may not qualify for the estate tax, it is still required to file a tax return with the Internal Revenue Service.
What estate planning opportunities were made possible by the TCJA?
The higher exemptions may expire in 2026, but this gives people time to plan their estates in a way that ensures they maintain these rates, even if smaller rates have been instituted by the time they die. For instance, individuals may be able to use some of their exemptions to make tax-free lifetime gifts. Lifetime gifts are exempted from taxes at an indexed rate that increases with inflation. Therefore, individuals can shield these gifts from estate tax by applying the new exemption to them. Likewise, properties transferred to a dynasty trust can avoid estate and gift taxes completely.
The TCJA also permanently expanded benefits associated with 529 plans, which can be used to pay for educational expenses. Previously, these funds could only be used for higher education costs; now, they can be used for elementary and secondary school costs as well.
Additionally, a popular estate tax loophole was closed by the TCJA. Previously, parents could transfer their wealth to their children to take advantage of the lower tax rate. Under the TCJA, a child’s unearned income is taxed at the parent’s tax rate.
How can tax professionals keep up with tax reform?
Experienced tax professionals had a lot of catching up to do in 2018. The reforms enacted by the TCJA were broad and very complex. Likewise, tax professionals weren’t given much time to familiarize themselves with the opportunities and challenges presented by the new laws.
The fully online master’s in taxation program from Northeastern University can help tax professionals expand their understanding of estate and gift tax law through courses like:
- Estate and Gift Taxation: This course covers the common taxes associated with the transfer of property and wealth.
- Income Taxation of Trusts and Estates: Examines topics such as the distribution of current income, grantor trusts, charitable vehicles, distributions, and more.
- Planning for Estate Tax Issues: Discusses advanced strategies for maximizing personal goals related to the passing of property from one generation to the next.
To prepare to reach the next step in your career as a tax professional, learn more about the Online Master of Science in Taxation degree from the D’Amore-McKim School of Business at Northeastern University.
Online MST Curriculum
Opportunities of estate & gift tax reform
Federal Estate Tax Exemptions 1997 Through 2019
How Will the Tax Cuts and Jobs Act Affect Your Estate Plan?
Recent developments in estate planning
Frequently Asked Questions on Gift Taxes
The Federal Gift Tax and How You Can Avoid Paying It