Tax Reform Highlights for Those Who Will Die One Day

By John O'Grady, O'Grady Law


Estate Tax: Give a Little More to Your Loved Ones

Or lawmakers have again reduced taxes on intergenerational wealth transfers. The exclusion from estate, gift, and generation-skipping tax is now $11.2 million per person ($22.4 million for couples). The estate tax rate for transfers over these amounts remains at 40%. The federal government will get less estate tax, and the younger generation will inherit more. Don’t get too excited. Thanks to a political compromise, the new law expires on December 31, 2025.

The annual gift tax exclusion amount increased from $14,000 to $15,000. Couples can give $30,000 to each child, grandchild, and others per year free of estate and gift tax. Unlimited additional tax-free gifts can be made for the direct payment to the providers of education (tuition only) and for most medical care. In many cases, good tax planning will include significant lifetime gifts in excess of these amounts to reduce the taxable estate. Such gifts must be reported on a gift tax return to show that some of the donor’s $11.2 million lifetime exclusion amount is being used up, although there will be no tax due with the return. Please keep in mind that this discussion only concerns transfer taxes and not income tax. Gifts and inheritances are not generally subject to income tax.

“Step-up” In Basis Rules Unchanged

For now, the “step-up” in basis rules have not changed. This means that the cost basis of inherited property will continue to be the date of death value and not what the decedent paid for the property.  Inherited property can be sold shortly after death with little or no income tax consequences. Many older adults and their families will continue to avoid selling the property during the lifetime of the older generation to save on income taxes.

 Tax Planning for the Young Ones

Under the new law, large sums of money may be invested in a 529 plan, which will grow tax-free like an IRA, for religious and private education beginning with elementary school (not just college). In the past, very few financial institutions made 529 plans available. We expect many more offerings to appear because of the expanded use of these educational savings plans. When estate planning includes children’s future education, ensure that guardianship documents are in order. See the following article on how to choose a legal guardian:

Home Mortgage Deduction Limited 

The new limits may affect the decision to purchase a home. Under the new law, a taxpayer can only deduct mortgage interest for debt incurred in the purchase up to $750,000.  Refinanced interest deductions may still be deducted if the new debt does not exceed the old debt. Home equity loan interest deductions have been eliminated. These limitations expire on December 31, 2025.

Capital Gain Exclusion on Sale of Your Home Unscathed 

The capital gains rules for the sale of a home remain intact. Each owner is entitled to exclude $250,000 of gain on the sale of a principal residence (a total of $500,000 for couples). The home must be the owner’s primary residence for two of the five years prior to sale.

Divorce Gets More Expensive:  Alimony Deduction is History

Tread lightly when negotiating alimony in divorce. The new tax law provides that, for agreements entered into after 12/31/2018, the payor cannot deduct alimony payments and the recipient does not report alimony received as income. Higher earning spouses will want to take full advantage of this higher tax burden in negotiating with the lower earning spouse.

About the Author
John O’Grady leads a full-service estate and trust law firm in San Francisco.  His practice includes Estate Planning & Administration, Probate and Trust Litigation.