QUINCY -- Primarily the wealthy will be affected by changes to the estate tax under the new tax law.
The Tax Cuts and Jobs Act more than doubles the federal exemption to the estate tax, bringing to the total from $5.5 million to $11.2 million. Married couples who plan ahead and elect portability each receive their own exemptions, meaning the federal estate tax will only have to be paid on sums higher than $22.4 million.
The increase in the exemption begins in the 2018 tax year. Those who do inherit more than the exemption pay a marginal tax rate of 40 percent.
"Even before 2017, the federal exemption was very high," said Bill Siebers, a Quincy attorney who practices elder law, estate planning and estate administration. "Prior to the new law, there was a lot of talk about repealing it, but that did not pass."
The exemption, which is triggered by the date of one's death, sunsets on Dec. 31, 2025. On Jan. 1, 2026, the exemption will revert back to the amount before the Tax Cuts and Jobs Act went into effect, adjusted for inflation. Siebers said, when adjusted for inflation in the cost of living, the estate tax exemption should be about $6.5 million.
"At these levels, less than 1 percent of the population is going to have a ‘death tax,SSRq" Siebers said.
According to Peterson Sullivan, a leading local public accounting and business advisory firm based in Seattle, the increased exemption amounts will reduce the number of U.S. estates subject to estate tax from about 5,000 to about 2,000.
The exemption is a little lower for Illinois residents. Illinois is one of only 10 states in the country to impose a separate estate tax on its residents. Illinois' estate tax exemption is $4 million. Missouri has no estate tax.
"A lot of people are leaving Illinois, and the estate tax is one of the reasons," Siebers said. "I don't see Illinois' estate tax going anywhere."
Siebers said the aspect of estate planning that will affect the most people, the step-up in cost basis, will remain unchanged under the new law. The step-up in cost basis eliminates the capital gains tax on inheritances.