The House Ways and Means Committee recently introduced a wide variety of potential changes to the tax code. The Committee specifically proposed rolling back the 2017 Trump Tax Cuts.
One of the potential tax law changes, that would take effect at the beginning of 2022, is a reduction of the Federal Estate Tax Exemption.
The Effect of the 2017 Trump Tax Cuts
The 2017 Trump Tax Cuts raised the Federal Estate Tax Exemption to $11.18 million for tax year 2018. The exemption was indexed for inflation and, as of 2021, currently stands at $11.7 million per person. A person can currently transfer up to $11.7 million of assets at death without incurring any Federal Estate Tax.
Further, through the use of portability, the first spouse to die can transfer their $11.7 million Federal Estate Tax Exemption to their surviving spouse and create a $23.4 million Federal Estate Tax Exemption for their surviving spouse. This Federal Estate Tax Exemption under the 2017 Trump Tax Cuts would be set to expire at the end of 2025.
Anticipating Law Changes in 2022
The bill introduced by the House Ways & Means Committee is attempting to change this and roll back the 2017 Trump Tax Cuts. Specifically, the Federal Estate Tax Exemption would not expire at the end of 2025. Instead, the exemption would expire at the end of 2021 and, beginning in 2022, the Federal Estate Tax will be reduced to $5 million.
Should this bill pass into law, it means that estate planning will be at the forefront for the remainder of the year. Families will have to seek to amend and adjust their estate planning prior to the end of 2021 in anticipation of the tax law changes in 2022.
Take Advantage of Exemptions Now
The 2017 Trump Tax Cuts also increased the lifetime Gift Tax Exemption to, as of 2021, $11.7 million. Therefore, a person can gift $11.7 million over the course of their lifetime.
The proposed adjustment to the sunset provision from 2025 to 2021 would reduce the $11.7 million lifetime gift tax exemption to $5 million. As a result of the proposed tax law changes, families, small business owners and others may want to take advantage of the current $11.7 million gift tax exemption before the end of 2021. There’s still a chance to reduce taxable estate as part of overall estate planning and tax planning strategies.
In addition to the Federal Estate Tax changes, the bill raised the top individual tax rate from 37% to 39.6%, increased the capital gains tax rate from 20% to 25%, capped the 20% qualified business income deduction at $500,000 and added a 3% surcharge for taxpayers with more than $5 million in income.
At the time of this writing, the bill introduced by the House Ways & Means Committee is not law. However, the bill was introduced by Democrats holding a majority in the House of Representatives and a slim majority in the Senate (with Vice President Harris holding the tie breaking vote). There is a distinct possibility of this bill passing into law and taking effect at the beginning of 2022.
For More Information
If you have additional questions about the information in this article and how it may impact your current estate planning strategy, please contact the Trust and Estate Attorneys at Aronoff, Rosen & Hunt, LPA at (513) 241-0400.
You can also use our contact form to schedule a time to discuss your Trust and Estate questions and concerns relating to potential tax law changes. You can also download one of our free reports on estate planning and trusts available on our website.
We look forward to hearing from you!