The new year brings a new outlook on life. As 2022 begins we have new resolutions, new hopes and we also have new tax rules. As the saying goes nothing is as definite as death and taxes. Understanding the new federal tax highlights for estate planning may be helpful as you consider planning options for 2022. We also must understand that Congress can continue to pass legislation that changes these rules during the year. Keep in touch with your estate-planning advisor or us prior to taking any transfer tax planning action. In the past year, we have heard a great deal about possible changes to the estate tax rules. There were serious consideration given to lowering the federal estate tax exemption amounts, reducing or eliminating the favorable capital gains tax rate and changing grantor trust rules. These proposals put estate planning in a high state of anxiety. Many were advised to gift large amounts of their assets to their heirs to take advantage of the present generous federal estate tax exemption. These projected changes did not happen… None of the major provisions that would have affected estate planning happened as the recent proposed federal legislation failed to pass. We will keep you posted on any new proposals or changes keeping in mind that the current tax law called “The Tax Cuts and Jobs Act (the “Act”)”which increased the federal estate tax exclusion amount for decedents dying in years 2018 to 2025 is set to sunset at the close of 2025. Changes in 2026 are inevitable, and will color estate tax planning of the next few years.
Key Tax Concepts for 2022
• Lifetime Exclusion Increases to $12,060,000: As of January 1, 2022, the federal gift and estate tax exclusion amount, and the generation skipping transfer (GST) tax, (collectively, the “transfer tax exclusion amounts”) have increased by $360,000 from $11,700,000 to $12,060,000 ($24,120,000 for a married couple). As we noted, the federal transfer tax exclusion amount could return to $5,000,000 adjusted for inflation if the current law sunsets in 2025.
• Annual Gift Exclusion Increases to $16,000: As of January 1, 2022, the federal gift tax annual exclusion amount (i.e., the amount that an individual can annually transfer to another individual without using any lifetime gift tax exclusion or paying any gift tax) increased by $1,000 from $15,000 to $16,000 ($32,000 for a married couple).
• Applicable Federal Tax Rates for Estates and Trusts are Unchanged:
• The highest federal estate tax, gift tax, and GST tax rate remains at 40%.
• The highest federal income tax rate for estates and non-grantor trusts is 37%. This tax rate applies to taxable income over $13,450 annually earned by an estate or non-grantor trust.
• Required Minimum Distributions: New life expectancy tables used for determining required minimum distributions (RMDs) from IRAs and qualified retirement plans went into effect as of January 1, 2022 impacting traditional (non-Roth) IRA owners and qualified retirement plan participants who have reached their Required Beginning Date for taking RMD (currently 72 years of age). It also affects the beneficiaries of an inherited IRA or qualified retirement plan. Contact your plan administrator or financial advisor regarding how to compute your RMDs for calendar year 2022 using the new tables. Remember that you must tax RMDs at the age 72 or face penalties.
• Step-Up in Basis: Under current federal tax laws, the income tax basis of property acquired from a decedent generally is set at the fair market value of that property on the date of the decedent’s death (often referred to as a “step-up” in basis at death). Although there were proposals in Congress to change this, Congress did not pass those proposals in 2021, so the step-up in basis at death remains in effect for 2022. Therefore, property that passes at death and sold soon after that death of will not face capital gains tax on the lifetime appreciation, but only on increase from the date of death market value.
• Federal Estate Tax Portability between Spouses: The ability to transfer a decedent’s unused federal estate tax exclusion amount to the decedent’s surviving spouse by filing a federal estate tax return (often referred to as “portability”) remains in effect for 2022. This means a married couple can use the full $24.12 million exemption before any federal estate tax would be owed. To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse’s estate.
New York Estate Tax
Despite the large Federal Estate Tax exclusion amount, New York State’s estate tax exemption for 2021 was $5.93 million. The exclusion amount for 2022 is $6,110,000. New York State still does not recognize portability between spouses. As a result each spouse has the full exemption amount but cannot pass on their unused portion to their surviving spouse as federal law permits. It is also important to note, NY has no gift tax at this time. However, New York does have a three-year lookback or “claw back” on gifts as of January 16, 2019. However, a gift is not includable if a resident or nonresident made it and the gift consists of real or tangible property located outside of New York State; while the decedent was a nonresident; before April 1, 2014; between January 1, 2019, and January 15, 2019.
In light of the above stability in the current estate tax law and the increase exclusion amounts, estate planning and business, succession-planning opportunities are still available in 2022. Contact our firm to review your current estate plan to ensure that your documents continue to achieve your tax and non-tax planning goals and take advantage of the continuing favorable laws
Most average taxpayers will never pay a federal or New York State estate taxes, but these laws are in flux. As noted, we may still see some changes in the law as the work continues to balance our country’s changing economic needs. Stay alert. We encourage you to continue to review your estate plans, as tax is not the only driver to your need to plan. Other motivators to get your legal house in order include long-term care planning, tax basis planning and planning to protect your beneficiaries or dependent heirs once they inherit the wealth. In addition, New York State’s separate lower estate tax exclusion makes it critical to do estate tax planning if you and/or your spouse have an estate that is potentially taxable under the New York State law even in light of the much more generous federal estate tax rules.
We look forward to working with you in 2022 on your estate planning.