At Mission Wealth, we’ve been intently monitoring the upcoming modifications within the tax code that would considerably affect our shoppers. In 2017, Congress handed the Tax Cuts and Jobs Act, ushering in sweeping modifications throughout the federal tax panorama. One of many notable modifications was the lifetime unified credit score exemption, which impacts property and reward taxes. This exemption represents the full amount of cash you’ll be able to go away to anybody throughout your lifetime or at loss of life with out incurring property or reward taxes.
The Act doubled this exemption quantity from $5.49 million per particular person in 2017 to $11.18 million in 2018, and it has continued to extend with inflation, reaching $13.61 million for 2024. This substantial improve has profoundly altered the property planning panorama for people coping with federal property taxes.
Who Owes Property Taxes?
Earlier than delving into the affect of those tax legislation modifications, it’s important to know what the federal property tax, sometimes called the “loss of life tax,” entails. Each particular person has their very own lifetime unified credit score exemption (known as exemption from right here on out), permitting them to cross a specified quantity tax-free to anybody throughout their lifetime or at loss of life. There are some exceptions, such because the limitless marital deduction, which permits married {couples} to switch property to one another with out utilizing their exemption. Moreover, there’s an annual reward exclusion, which permits people to present a set quantity to as many individuals as they want with out affecting their exemption. For 2024, the annual exclusion is $18,000. Married {couples} can even mix their exemption via a technique of electing portability on their property tax return, permitting the surviving partner to probably double their exemption.
The property tax charge itself varies relying on the taxable property’s worth, beginning at 18% and reaching 40% for quantities exceeding $1 million.
Right here’s a breakdown of the federal property tax brackets:
|
Federal Property Tax Brackets |
|
|
Taxable Quantity |
Property Tax Fee |
|
$1 – $10,000 |
18% |
|
$10,001 – $20,000 |
20% |
|
$20,001 – $40,000 |
22% |
|
$40,001 – $60,000 |
24% |
|
$60,001 – $80,000 |
26% |
|
$80,001 – $100,000 |
28% |
|
$100,001 – $150,000 |
30% |
|
$150,001 – $250,000 |
32% |
|
$250,001 – $500,000 |
34% |
|
$500,001 – $750,000 |
37% |
|
$750,001 – $1 million |
39% |
|
$1 million+ |
40% |
Now, let’s illustrate these ideas with a sensible instance. Take into account a married couple – Mike and Carol – who’ve a complete internet value of $30,000,000. Mike passes away in early 2024, leaving all the things to his spouse Carol. Due to the limitless marital deduction, Mike doesn’t use any of his exemption. Carol well timed recordsdata an Property Tax Return (Kind 706) displaying no tax due and elects portability, rising her exemption to $27.22 million. Carol sadly passes away on the finish of 2024 and leaves all her property to their 6 kids – Greg, Peter, Bobby, Marcia, Jan, and Cindy. Keep in mind that Carol has $30,000,000 of property at the moment, which means her taxable property exceeds her exemption by $2,780,000 and she’s going to owe property taxes to the tune of $1,057,800.
Most taxpayers won’t discover themselves on this scenario, nonetheless. Based on the most recent information accessible from the IRS, in 2021, solely 2,584 property tax returns have been filed that owed taxes. Which means solely 0.08% of grownup deaths in the US resulted in a taxable property. The historic development signifies a decline in taxable estates, with just one% of grownup deaths having taxable estates earlier than 2004, aside from 2010 when the property tax was quickly abolished.
The Sundown Looms
The Tax Cuts and Jobs Act was handed utilizing a finances reconciliation methodology, requiring its provisions to run out inside 10 years of passage. On December 31, 2025, at midnight, the tax code’s up to date provisions will expire, drastically altering the tax panorama. The exemption will probably be halved, we estimate it to be round $7 to $7.5 million per particular person, and the property tax charge will improve to 45%.
Take into account one other state of affairs with Al and Peggy, a pair with a internet value of $15 million in 2024. If each Al and Peggy have been to cross away in 2024, they wouldn’t face any property tax points attributable to their mixed exemptions of $27.22 million, nicely above their property worth. Nevertheless, in the event that they outlive the tax legislation sundown, their exemptions will drop to $7 million every. In the event that they each cross away on the finish of 2026, their mixed exemption can be $14 million, leading to property taxes of $450,000 because of the change in tax legal guidelines (assuming a flat 45% property tax charge).
2024 and 2025 Property Planning Alternatives
Most households will proceed to not have an property tax difficulty after the sundown – $7 million in exemption as a substitute of $13.61 million is a big lower, however taking a look at historic traits, will nonetheless affect lower than 1% of households per yr.
Nevertheless, for high-net-worth people 2024 and 2025 current property planning alternatives to leverage the expanded exemption earlier than the window closes. The IRS has indicated no penalties for people utilizing their expanded exemption earlier than sundown, making it a “use it or lose it” scenario. By making strategic strikes like gifting property or establishing particular trusts, people can defend vital property from future property taxes. For people with the liquidity to take action, benefiting from the expanded exemption in the present day may save nearly $3 million in future property taxes (the distinction between the 2024 exemption and the projected post-sunset exemption of $7 million instances 45% property tax charge).
For different people who’re on a fast improve of their internet value – perhaps via their very own enterprise, making good investments, or high-income earners – have a look at your monetary outlook now and run state of affairs evaluation to see if some sure property plan strikes make sense to start implementing.
At Mission Wealth, we advocate proactive planning, together with property planning, to assist our shoppers scale back potential future property tax burdens and help their monetary objectives. Focus on your property plan outlook along with your wealth advisor in the present day to discover tailor-made options that align along with your particular wants and aspirations or contact us in the present day to get began.
