Estate Taxes as 2022 Begins
The most onerous revisions to the estate tax landscape never made it into law at the end of last year. This is good news! The high federal estate tax exemption is still in place - $12,060,000 in 2022, up from $11,700,000 million in 2021. New York’s estate tax exemption is $5,930,000 for 2022, up from $5,850,000 for 2021.
With the federal exemption, a surviving spouse can use a deceased spouse’s unused exemption if a protective election is claimed on a Form 706 filed on the death of the first spouse. This means a couple can shield over $24 million of combined assets from estate tax. Note that even if the estate of the first spouse is not in a taxable position, a Form 706, Estate Tax Return, must be filed to claim the unused exemption. The claim for the unused exemption can be made until two years after the date of death.
Although the exemption level is high, the tax rate is 40% when it does apply. And the tax may apply to more than you realize. Under the U.S. estate/gift tax system, all taxable gifts you made during your life, as well as what you own at your death, are subject to tax, absent an exemption.
Certain gifts are exempt from tax and these include gifts to spouses, charities, and any number of people up to the amount of the annual gift tax exclusion. For 2022, the annual gift tax exclusion increases to $16,000, up from $15,000/per person, where it had remained for several years.
If you make gifts up to the annual exclusion amount, no gift tax return is required to be filed. Spouses can make gifts up to $32,000 per person for 2022. However, if you make a gift in excess of this amount, a gift tax return is required to be filed, even though no estate/gift tax is due. Consider the following example:
Husband and Wife give their son a $200,000 wedding present to put toward the purchase of a home. If the gift is made to both son and new wife, $64,000 will be exempt from tax because of the annual exclusion. ($16,000 from Husband and $16,000 from Wife, to both son and daughter-in-law).
Since the total gift exceeds the annual exclusion by $136,000 ($200,000 - $64,000 = $136,000) Husband and Wife will file a gift tax report which reflects a $136,000 gift. If Husband and Wife have an exemption amount remaining ($12,060,000 per person for 2022), no tax would be due. However, they will have eaten into their exemption to the tune of $136,000. This amount will reduce the available exemption at death.
Very few people pay federal estate tax. According to the IRS, just .2% of U.S. adults have owed estate tax in recent years, much lower than the 1-2% historical share. For 2019, believe it or not, there were only 2,570 taxable estate tax returns filed in the US.
Unlike the federal tax system, New York’s estate tax, graduated up to 16%, does not have a gift tax and no longer taxes gifts within three years of death. For New Yorkers whose assets are close to the exemption amount, planning is essential because the exemption is eliminated if your estate exceeds the exemption amount by more than 5% ($296,500). What does this mean? If your estate is valued at $6,226,500, the entire amount is subject to tax, not just the amount above the exemption.