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Federal rules ease up on estate, gift tax

California has no inheritance, estate or gift tax. In an effort to clarify and ease the federal rules regarding gift and estate taxes, the IRS now says large gifts won’t harm estates after the law runs out in 2025.

Sound confusing? It's easily explained, although if you plan on giving between $5 million and $10 million as gifts during tax years 2018 to 2025, you should probably consult with a good lawyer.

Gift and estate taxes

Here’s how gift and estate taxes work: If you give someone a gift, you have to pay a tax. If you die, your estate has to pay a tax on the amount of money it leaves behind. However, the federal government allows you to exclude $5 million from these taxes.

The tax cut authorized by Congress in 2017 changed that amount. First, it doubled the exemption from $5 million to $10 million. Then it allowed the figure to be indexed for inflation – for example, the 2018 figure has been adjusted for inflation to $11.18 million. This adjustment will occur every year until the law faces reauthorization in 2025, at which time it will drop back to $5 million (adjusted for inflation between 2017 and 2025).

Which tax exclusion do you use?

This caused some people to worry. If they use a gift exclusion that totals, say, $11 million and then the owner of the estate dies after 2025, would the estate use the pre-2025 $11 million exclusion or the post-2025 $5 million (adjusted for inflation) exclusion?

That’s the problem the IRS addressed: Would an estate have to pay more after the law reverts to 2017 levels?

The answer is no. The IRS won’t penalize an estate for using the exclusion. A newly issued special rule states that an estate can use the greater exclusion: One used for a gift during life or for an estate after death.

This ruling affects federal taxes. California has no state gift or estate tax, nor does it have an inheritance tax, which is paid by those who receive money from an estate.

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