Estate tax exemption: What's changing in 2024

Navigating through the complexities of estate planning can sometimes feel like a maze. But you're not alone! In this guide, we lay out the basic changes to help you make informed decisions for yourself and your loved ones.

Understanding the estate tax exemption

When someone dies and they leave an estate, that estate may be taxed if it exceeds a certain amount. Think of the estate tax exemption as a sort of coupon or pass from the U.S. tax code. It allows all or a portion of someone's estate to avoid taxes after they pass away. In 2024, this "coupon" is worth $13.61 million for individuals according to the Internal Revenue Service (IRS). If what you leave behind is valued below this amount, the federal government gives you a free pass on estate taxes.

The intricacies of the estate tax

The estate tax is essentially a tax on what you leave behind. Unlike a sale at your favorite store, this tax applies to the total value of the estate above the exempted amount. With tax rates potentially reaching up to 40%, strategic planning becomes crucial to avoid a hefty tax bill. Thankfully, many people won't have to worry about this tax at all thanks to the exemption.

The benefits of strategic gifting

Smart gifting can help big-time here. By moving some of your wealth into a trust that you can't take back, you can shrink the taxable part of your estate. This move can be a game-changer, especially if your estate is hovering over the exemption threshold, allowing you to leave more behind for your loved ones without the tax bite.

Keeping up with changes

The exemption amount isn't set in stone; it changes with inflation and new laws. For example, the IRS set the 2023 individual exemption at $12.92 million. Staying updated with these shifts is key to good estate planning. Teaming up with a financial advisor or an estate planning lawyer can help you steer through these updates more smoothly.

2023 estate tax exemption thresholds

• $12.92 million for individuals

• $25.84 million for married couples

2024 estate tax exemption thresholds

• $13.61 million for individuals

• $27.22 million for married couples

Frequently asked questions about estate tax exemptions

What is the estate tax exemption?

A: The estate tax exemption is a legal provision in the US tax law that allows a certain amount of an individual's estate to be exempt from taxation upon their death. 

Q: What is the current federal estate tax exemption limit?

A: As of 2023, the individual federal estate tax exemption limit was $12.92 million. However, these limits are subject to change and are updated annually. These expanded estate tax exemption limits, which rose temporarily in 2017, are set to expire in 2025. 

Q: How does the Tax Cuts and Jobs Act (TCJA) impact the estate tax exemption?

A: The Tax Cuts and Jobs Act nearly doubled the estate tax exemption limit when it was enacted in 2017. This means more wealth could be transferred to heirs without incurring federal estate taxes. Unless the act is extended, the higher limits are set to expire in 2025. 

Q: Can I reduce my estate tax liability?

A: Strategic gifting can help reduce your taxable estate and potentially lower your estate tax liability. This involves transferring assets into an irrevocable trust.

Q: Is the estate tax exemption the same in all states?

A: Estate tax and inheritance tax laws and amounts vary by state. Some states impose their own estate or inheritance tax, and the exemption thresholds can be much lower than the federal limit.

Q: Are estate tax rates fixed?

A: No, estate tax rates can vary by year and are subject to legislative amendments. Staying updated with estate tax exemption updates can help in effective estate planning.

Q: How can I claim the estate tax exemption?

A: The estate tax exemption is automatically applied to the estate of the deceased. However, it's best to consult with a tax professional to understand how to claim the estate tax exemption and navigate the filing process.

Q: Does the exemption apply to capital gains tax?

A: No, the estate tax exemption doesn't apply to capital gains tax. Heirs may owe capital gains tax if they sell inherited assets that have appreciated in value.

Remember, it's always wise to seek advice from a tax professional when dealing with complex tax laws. They can help to reduce your taxable income and provide guidance on how to navigate the complexities of estate taxes. By staying informed and seeking professional advice, you can ensure that your wealth is passed on to your heirs in the most tax-efficient manner possible.