IRS confirms tax break for large gifts

The Internal Revenue Service and the Treasury Department issued final regulations Friday confirming that individuals who take advantage of the increased gift and estate tax exclusion amounts that are in effect from 2018 to 2025 under the Tax Cuts and Jobs Act won’t be adversely affected after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

Treasury Decision 9884, which was posted Friday in the Federal Register, implements changes made by the Tax Cuts and Jobs Act of 2017, which made corporate tax cuts permanent, but allowed for individual tax cuts to expire in 2025. While the final regulations mostly adopt the proposed regulations that were released last November, they also include some clarifying technical language to address the concerns raised in several public comments. The final rules also include four examples to illustrate the impact of inflation adjustments and other matters. As a result of the final regulations, individuals who have planned to make large gifts between 2018 and 2025 can do so without worrying they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

Andrew Harrer/Bloomberg

In general, gift and estate taxes are computed using a unified rate schedule on taxable transfers of money, property and other assets. Any tax that’s due is determined after applying a credit — formerly known as the unified credit — based on an exclusion amount. The applicable exclusion amount is the total sum of the basic exclusion amount (BEA) established in the statute, and other elements, if applicable, described in the final regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.

The Tax Cuts and Jobs Act temporarily increased the basic exclusion amount from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2019, the inflation-adjusted BEA is $11.4 million. In 2026, the BEA will revert back to the 2017 level of $5 million, as adjusted for inflation.

In response to concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the final regulations include a special rule allowing the estate to figure 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.