Why is the Tax Cuts and Jobs Act 2017 in the news again, and what’s the sunset provision?
If you are a US citizen, you might have forgotten, but you have been enjoying exempted estate taxes since 2018, which is going to end in 2025. Also, estate tax exemption and Federal exemption amounts have increased for the best interest of the middle class in 2025.
So, if you are wondering what the new exemption amounts are in 2025 and how estate tax will change drastically if Congress doesn’t extend the law, this blog is for you.
What Is Estate Tax?
An estate tax refers to the percentage of tax applicable on the estate a person leaves to their beneficiaries. It is similar to income tax where the tax slab or rate increases as the value of your property increases.
Some states in the US have Federal estate tax while others have an estate tax. Tax Cuts and Jobs Act 2017 is a Federal regulation so it impacts the Federal estate tax.
Federal estate tax laws impose an 18% to 40% tax on the property. The tax is applicable to the market value of the property at the time of the death of the individual.
However, the IRS also imposes an exemption for middle-class US citizens to own properties without paying hefty taxes. The estate law exempts individuals from paying estate tax for property worth up to $5,000,000.
This means that individuals owning estates worth below $5,490,000 do not have to pay taxes. But those who own estates worth above $5,490,000 (for example, $6,000,000 or $8,000,000) have to pay taxes depending on the market value of the property at the time of the death of their ancestor.
The US government reduced income tax slabs and increased estate tax exemption in 2017 by bringing the Tax Cuts and Jobs Act 2017. This changed the estate tax laws significantly.
What Is the Tax Cuts and Jobs Act 2017?
The Tax Cuts and Jobs Act 2017 or TCJA suggested several changes in the income tax and estate tax regulations.
Some of the major changes TCJA introduced are:
- Reduced personal income tax rates
- Doubled the standard deduction
- Capped the state and local tax deduction
- Limited the deduction on home mortgage interest
- Nullified many itemized deductions
- Set flat corporate tax rate at 21%
- Allowed 20% deduction on qualified business income
- Increased the Federal estate tax exemption amount
However, the TCJA also included a Sunset provision that validated these changes for a period of 8 years from 2018 to 2025. After 2025, the changes will be nullified and previous regulations will be implemented unless Congress extends the period or brings new amendments to the tax regulations.
Impact Of Tax Cuts and Jobs Act On Estate Tax
Tax Cuts and Jobs Act brought major changes in the Federal estate tax exemptions. It increased the estate tax exemption from $5,490,000 to $13,610,000.
When the exemption is $5,490,000 a married couple could own property worth $10,980,000 without paying estate tax. However, after the amendment, a married couple can own properties up to $27,220,000 without estate tax liability.
This was a significant relief for US citizens, which was much appreciated.
Sunset of Federal Exemption Amounts at the End of 2025
The Federal Tax Cuts and Jobs Act exemption ends on 31st December 2025. This is the Sunset provision that was included in the Act at the time of its execution.
Now if the government does not alter the law, extend it, or bring new amendments, the base exemption rates applicable before 2017 will apply. This means that the estate tax exemption will reduce from $13,990,000 (present) to $5,000,000 (will be adjusted for inflation).
Federal Exemption Amounts Increased to $13,990,000 in 2025
As of January 1, 2025, the federal gift and estate tax exemption amount, as well as the exemption from generation-skipping transfer (GST) tax, (collectively, the “federal exemption amounts”) have increased from $13,610,000 to $13,990,000, an increase of $380,000 per person. A married couple can combine their exemptions to transfer twice this amount, or a total of $27,980,000.
Annual Exclusion Amount Increased to $19,000 in 2025
The annual gift tax is the amount an individual can gift to his friends, family, or dear ones in a calendar year. However, if the gift amount exceeds the exempted limit, he will have to pay gift tax on the amount he gifted.
From January 1, 2025, the gift tax exclusion amount has increased from $18,000 to $19,000 for individuals and $38,000 per donee for a married couple. That’s a $1000 increase per donor from 2024.
Estate Tax Vs Inheritance Tax
The distinction between estate tax and inheritance tax is crucial for understanding how taxes are levied on assets after death. Here are the key differences:
Who Pays the Tax?
- Estate Tax: This tax is paid by the estate of the deceased individual before any assets are distributed to beneficiaries. It is based on the total value of the estate’s assets at the time of death.
- Inheritance Tax: In contrast, this tax is paid by individual beneficiaries who inherit property from the deceased. The amount owed depends on the value of the inheritance received and, in some cases, the relationship to the deceased.
Federal vs. State Taxes
- Estate Tax: There is a federal estate tax that applies to estates exceeding a certain threshold (currently around $13.61 million for 2024). Some states also impose their estate taxes, often with lower exemption limits.
- Inheritance Tax: This tax is only imposed at the state level, and there is no federal inheritance tax. Currently, only six states—Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Iowa—have an inheritance tax.
Conclusion
The year 2025 is a crucial year for US citizens as the estate tax exemptions will drastically change next year. That is why you must start planning smartly your estate tax in 2025.
