Estate and Gift Tax FAQs

The FAQs on this page provide details on how tax reform affects Estate and Gift Tax. Visit the Estate and Gift Taxes page for more comprehensive estate and gift tax information.  

Making large gifts now won’t harm estates after 2025

On November 26, 2019, the IRS clarified that individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. The IRS formally made this clarification in final regulations released that day. The regulations implement changes made by the Tax Cuts and Jobs Act (TCJA), tax reform legislation enacted in December 2017. Here are some questions and answers on the new law and regulations.

Q. What are gift and estate taxes?

A. Gift and estate taxes apply to transfers of money, property and other assets. Simply put, these taxes only apply to large gifts made by a person while they are alive, or large amounts left for heirs when they die.

Q. How are gift and estate taxes figured?

A. In general, the Gift Tax and Estate Tax provisions apply a unified rate schedule to a person’s cumulative taxable gifts and taxable estate to arrive at a net tentative tax.  Any tax due is determined after applying a credit based on an applicable exclusion amount.  A key component of this exclusion is the basic exclusion amount (BEA).  The credit is first applied against the gift tax, as taxable gifts are made.  To the extent that any credit remains at death, it is applied against the estate tax.

Q. How did the tax reform law change gift and estate taxes?

A. The tax reform law doubled the BEA for tax-years 2018 through 2025. Because the BEA is adjusted annually for inflation, the 2018 BEA is $11.18 million, the 2019 BEA is $11.4 million and for 2020, the BEA is $11.58 million. Under the tax reform law, the increase is only temporary. Thus, in 2026, the BEA is due to revert to its pre-2018 level of $5 million, as adjusted for inflation.

Q. How did the IRS clarify the law?

A. To address concerns expressed by a number of stakeholders, the final regulations clarify that people taking advantage of the increased BEA by making gifts during the period 2018 to 2025 will not be harmed after 2025 when this amount is scheduled to drop. The regulations provide a special rule that effectively allows the estate to compute its estate tax credit using the greater of the BEA applicable to gifts made during life, or the BEA applicable on the date of death.  As a result, people planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases.

Q. How does the special rule work?

A. Here’s an example. Before 2018, A had never made a taxable gift. In 2018 when the BEA is $11.18 million, A makes a taxable gift of $9 million. A uses $9 million of the available BEA to reduce the gift tax to zero.  A dies in 2026.  Even if the BEA is lower that year, A’s estate can still base its estate tax calculation on the higher $9 million of BEA that was used in 2018.  

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

Disclaimer

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.