How much time do you spend planning vacations each year? How long do you research different makes and models of vehicles before deciding which one to buy? Most people spend hours on these types of activities, but how many of us put the same amount of time and effort into planning what will happen to our assets when we’re gone?
Estate planning is an important part of life. Unfortunately, no one can predict when they’re going to die or if they will suddenly become incapacitated due to poor health or injuries. Estate planning is all about protecting your loved ones and ensuring they receive your valuable assets when you’re gone.
Part of estate planning is understanding how the estate tax works. Here is some important information about the estate tax and the estate tax exemption. In 2022, the estate tax exemption is changing. Keep reading to find out how.
Understanding Estate Tax
The estate tax is also commonly referred to as the “death tax.” It’s a tax levied on the transfer of a deceased person’s estate based on the current fair market value of the estate’s assets. An estate tax filing is required for estates with prior taxable gifts and combined gross assets exceeding a certain amount (based on the value of the estate and the decedent’s year of death).
What To Know About Estate Tax Exemption
The federal government allows for estate tax exemptions on qualifying estates. It is important to note that some states also have laws governing estate taxes. Those who qualify for federal estate tax exemptions may still need to pay state-level estate taxes.
The federal estate tax exemption refers to a specific amount below which an estate is not subject to taxes when the estate owner dies. When a person dies, the value of their estate determines whether or not it qualifies for the estate tax exemption.
How the Estate Tax Exemption Changes in 2022
Every taxpayer is provided a lifetime estate and gift tax exemption amount. In 2022, the lifetime exemption increased from $11.7 million to $12.06 million. What this means is that when a person dies, if the value of their estate amounts to more than $12.06 million, the estate is subject to the federal estate tax. However, some exclusions may be possible. The estate tax exemption undergoes an annual adjustment for inflation, so it is not unusual that the exemption is rising in 2022. However, unless tax laws change, the estate exemption amount will drop once again when the current estate tax exemption ends (on the last day of 2025).
What Will Happen To the Estate Tax Exemption in 2025
The lifetime gift and estate tax exemption of $12.06 million for 2022 is scheduled to end on the last day of 2025. When this happens, the estate tax exemption amount will return to the $5 million cap under the previous law. When adjusted for inflation, this means that the estate tax exemption in 2025 will drop all the way down to around $6.2 million. Of course, this may change if the law is changed before the current estate tax exemption expires.
Estate planning can be a complicated matter, with estate tax exemptions being only a very small part of the total puzzle. Contact AmeriEstate for help with all your estate planning needs.