Since 2011, the federal estate tax has changed at the beginning of each New Year. As such, it is important to review the estate tax landscape both at the federal and state level. Below, we will discuss the estate planning tax laws.
First, in Maryland there is a $5 million estate tax exclusion. What that means is that if you pass away with anything less than $5 million, there is no estate tax owed to Maryland. We can often double this number for married couples using a variety of strategies. This number remains unchanged heading in to the beginning of 2022, however, Maryland holds their annual legislative session at the beginning of the year and through the spring. It is possible this figure could change, although with the current climate, it is my opinion it will remain unchanged for 2022.
Second, the federal estate tax exclusion was $11.7 million for 2021. By way of a little bit of history, in 2011, the federal estate tax exclusion was set to $5 million and indexed for inflation. This meant that each year there were incremental adjustments made. However, in 2017 the Trump Tax Cuts and Jobs Act doubled the exemption to $10 million indexed for inflation. That is how we ended up at $11.7 million for 2021. In 2022, the adjustment for inflation brings the current exemption up to $12.06 million. As is the case for the Maryland exemption, we can often double that for married couples.
Additionally, at the federal level there is a gift tax exclusion. The gift tax exclusion was also increased to $16,000 per year. This means that any person can give any other individual up to $16,000 as a gift in 2022 without having to report the gift to the IRS. If the gift exceeds that amount, the giver of the gift will have to report it to the IRS and file a gift tax return.
As we look ahead in estate planning, it may seem that for most people there is no need to worry about estate taxes. That is true for the time being. However, the Trump Tax Cuts and Jobs Act increase in the estate tax exemption is slated to expire January 1, 2026 and will revert back to $5 million. Additionally, President Biden has proposed a reduction down to $3.5 million and an elimination of the step up in basis rules. It is critically important to pay attention to any proposed changes because if Biden’s proposals pass, it would fundamentally change estate tax planning.
If you have any concerns about estate taxes, please contact us today.