Estate and gift tax exclusions were raised, but for how long?
The 2017 Federal tax legislation doubled the current estate tax exemption for US residents for tax purposes to over $11 million from $5 million. That impacts the lifetime gift tax exemption, too, because the same limits apply. But the big question that impacts tax and estate planning is this: will the current exclusion limits survive past 2025, when they are currently set to expire?
Indexing of the estate and gift exclusion was also updated by the 2017 law. Prior to 2017, the Consumer Price Index was used to adjust for inflation. The new law requires the use of the Chained Consumer Price Index (CCPI) to adjust for inflation. The difference is the CCPI is permanent. Even if the current tax law sunsets after 2025, the CCPI will be used to make adjustments for the cost of living.
The current gift tax annual exemption is $15,000. That means anyone can make a gift of up to $15,000 to a friend or relative and it will not be counted against the lifetime gift tax exemption limit of $11 million. If the gift is in excess of the exempt amount, the giver will have to file an estate and gift tax return.
The possibility that the 2017 Tax Cut and Jobs Act will sunset in 2025 requires a tax planning strategy to avoid a large tax bill if the lifetime limits revert to 2016 levels of $5 million.
Estate tax exclusion for nonresident aliens
Nonresident aliens adhere to a different set of rules for estate and gift tax. Resident aliens, or people who live in the US but are not citizens, pay estate and gift taxes in the same manner as US residents for tax purposes or citizens.
The issue of residency is different for filing an income tax return compared to paying estate and gift taxes. Residency for income tax purposes domicile is determined by a formula regarding the number of days a person has spent in the US in a specific timeframe. For estate and gift taxes, the issue is where the person is domiciled at the time of death. If they live in the US and do not have a domicile elsewhere and have no intent to move, they are domiciled in the US. Other factors are relevant, such as, where they have the bulk of their property.
Nonresident aliens have a $60,000 tax exclusion on their estates, much lower than the $11 million for resident aliens and US residents for tax purposes. This exclusion is only for property in the United States and there is no credit for foreign estate taxes.
Gift taxes, for nonresident aliens, have the same annual exclusion of $15,000 as US residents for tax purposes. The marital deduction for gift taxes applies only to US citizen spouses, but there is a $155,000 gift tax exclusion for non-citizen spouses.
Note that there are applicable tax treaties that may apply to estate and gift taxes.