The Internal Revenue Code has been a central focus of both taxpayers and tax advisers over the past two years. The recent 2017 Tax Cuts and Jobs Act ("TCJA") was the first major change to the Code since the Tax Reform Act of 1986. Many of the TCJA provisions benefit low- and middle-income taxpayers; however, the TCJA also provided tax benefits to high-income taxpayers. Some of these changes relate to estate and gift tax rates, exemptions, and exclusions. This discussion considers these salient provisions. Additionally, this discussion addresses current proposals in Congress that are intended to amend some of the TCJA benefits to high-income taxpayers. Although many of the proposals are targeted at curtailing the tax benefits provided to affluent taxpayers, some proposals attempt to redirect tax receipts from high-income and high-net-worth taxpayers to the middle class, infrastructure projects, and educational programs.
The Tax Cuts and Jobs Act ("TCJA") was enacted into law on December 22, 2017. This landmark change to the Internal Revenue Code (the "Code") was particularly beneficial to wealthy taxpayers in the areas of estate tax and gift tax and reduced income tax burdens for some taxpayers, with the notable exception of certain higher earners in states with high state income taxes who saw their state and local tax deductions capped.
In recent months, various lawmakers—virtually all of whom opposed passage of the TCJA—have again suggested that the TCJA may be too generous to high-net-worth individuals and families.
Some lawmakers have suggested changes to the TCJA that would reverse certain aspects of the trust and estate tax statutes. Of these proposals, some are elaborate, while others are not yet fully developed. As issues of income inequality and the taxation of wealth continue to be debated, high-income and high-net-worth taxpayers should stay abreast of the current tax proposals in Congress.
This discussion summarizes the current TCJA and the current tax proposals in Congress as they relate to estate tax and gift tax matters.
Current TCJA Gift and Estate Tax Laws
Under the TCJA law, effective January 1, 2018, each person is granted an exemption of $11.18 million from payment of U.S. gift tax and, to the extent not applied toward gift tax, U.S. estate tax. This exemption effectively shelters the taxpayer up to an aggregate amount of $11.18 million in 2018, twice the amount that was applicable in the year before.
For each year after 2018, this exemption amount will be indexed to inflation. For tax year 2019, the exemption amount is now $11.4 million. For married couples, exemptions can be aggregated. In 2019, this amount is $22.8 million. The annual gift exclusion amount is set at $15,000 and is not adjusted annually for inflation.
Taxable transfers of any amount that exceed the exemption amount then in effect are subject to a transfer tax of 40 percent under the TCJA. This is the same tax rate as was in effect prior to the TCJA.
However, absent additional legislation, this new exemption level will terminate on December 31, 2025, and revert thereafter to the unified credit amount in effect prior to the enactment of the TCJA, or $5 million indexed for inflation after 2011.
Given the doubling of the gift and estate tax exemptions, as well as the lower income tax rate brackets, some legislators have criticized the taxpayer-friendly changes to the Code.
The following sections highlight the current proposals by members of Congress. Many of these proposals attempt to redirect tax savings to the middle class, infrastructure projects, and educational programs at the expense of high-net-worth taxpayers.
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