In 2017, estate tax thresholds were at $5.49 million. In 2018, the threshold more than doubled to $11.18 million and now sits at $11.7 million. This increase is currently set to expire in 2025, but with changes in our government administration, the amounts may lower to pre-2018 thresholds again as soon as this year.
You may need to make adjustments in your own estate planning for 2021.
Joe Biden has already called for higher taxes on the wealthy, and with a controlling majority in both the house and senate, his recommended tax changes will likely pass. To put it simply, income tax rates will increase, and tax exemptions will decrease. But there is a silver lining. You can take another look at your tax planning now and make changes to your estate while exemption rates are higher.
Some important factors to consider as you consider tax planning for 2021 include:
- Combining exemptions – For married couples, the exemption is currently $11.7 million per person. This means that you don’t have to pay any estate taxes until you reach a combined threshold of $23.4 million.
- Transferring to a spouse – If one spouse passes away, there is no tax on transferring assets to the surviving spouse. If any assets are distributed to other relatives, the total value of the transfer comes out of your $11.7 million individual exemption. Any remaining exemption value is also transferred to your surviving spouse, increasing the tax threshold when they pass away.
- State taxes – New York is one of a dozen states that currently impose their own estate tax in addition to federal income taxes you may have to pay on your estate.
- Income tax – Since Biden’s tax plan also includes an increase in income tax for the wealthy, you may be affected in more ways than one. Any money you make in 2021 could be taxed at a higher rate, leaving you with fewer assets.
What does this mean for you?
If current exemption amounts are repealed, you’ll be taxed on any assets over about $5 million per individual or about $10 million per couple. This leaves $11.4 million more of your assets than under current law slated for being taxed at 40%.
What steps can you take now to protect your estate?
- Give gifts – You can give individual gifts up to $15,000 (or $30,000 for married couples) to each family member without being taxed. Keep in mind that larger gifts may be subject to a gift tax imposed by the IRS.
- Make charitable donations – You can donate money directly to charities or set up a trust that transfers assets to charity upon your death.
- Rearrange your assets – Speak with a trusted financial planner, CPA, or tax attorney to see what types of options, like trusts and life insurance, are available to utilize in your estate and income tax planning.
You can never completely avoid paying taxes, but with smart money-management options, you can lessen the tax burden that your family will have after your death. Contact the Law Offices of Lawrence Israeloff, PLLC for help with tax planning for your estate. Don’t put off for tomorrow what you can take care of today.
