2024 Tax Exemptions Increase with Inflation Adjustment
Under current U.S. law, an individual can give away a certain amount of property during life or upon death without incurring federal gift or estate tax by availing of exemptions provided under the Internal Revenue Code (IRC). These exemptions are periodically adjusted for inflation to keep up with prevailing economic conditions. Recently, the U.S. Department of Labor Statistics issued statistical data on inflation, specifically the consumer price index (CPI) which is measured by the change in prices paid by consumers for goods and services. In its latest report, Bloomberg Tax & Accounting released projections using CPI for U.S. tax rates, brackets, and exemptions for 2024. The exemptions are generally expected to increase which then allows for an opportunity to update gift and estate plans.
The Tax Cuts and Jobs Act (TCJA) provides for tax exemptions pertinent to trusts and estates. Under the TCJA, the basic exclusion amount (BEA) and the generation-skipping transfer (GST) tax exemption amount are each $10,000,000 per individual, adjusted for inflation. The BEA is the aggregate amount a taxpayer can pay during life or upon death without an estate or gift tax, while the GST tax is a federal tax imposed on transfers by gift or inheritance to beneficiaries who are 37.5 years younger than the donor (typically a grandchild). For 2024, the BEA and the GST tax exemption are anticipated to increase to $13,610,000 (from $12,920,000 in 2023). If a taxpayer has exhausted the full exemption and the exemption amount increases in a future year, the additional exemption may be used in that year. For example, an individual can gift another $690,000 in 2024 if he or she has already used up his or her lifetime exemption.
Donors can also make a specific amount of gifts tax-free every year. The annual exclusion is subject to inflation adjustment: the exclusion amount for gifts is expected to increase to $18,000 in 2024 (from $17,000 in 2023). Such exclusion is removed from the total amount of taxable gifts of present interest in property to any person during a year. For donors who give away a present-interest gift to his or her spouse who is not a U.S. citizen, the annual exclusion amount will go up to $185,000 in 2024 (from $175,000 in 2023). With these adjustments, taxpayers can now make more gifts by availing of the enhanced annual exclusions.
It is important to currently avail of these advantages in light of the scheduled sunset of the historically-high exemption amounts after the TCJA expires by the end of 2025. On January 1, 2026, unless the U.S. Congress passes legislation otherwise, the BEA and the GST tax exemption amount will both be reduced to $5,000,000 per individual, adjusted for inflation (anticipated to be $6-7 million in 2026). Another tax planning technique worth considering to leverage the exemptions is giving away interests in business, such as a corporation or LLC. Instead of making cash gifts, transferring a business interest offers valuation discounts for minority or for lack of marketability. It now behooves individuals and fiduciaries of trusts and estates to take full advantage of these enhanced exemptions and tax planning opportunities.
The CPI for September 2023 published by the U.S. Bureau of Labor Statistics can be found here: Consumer Price Index Summary – 2023 M09 Results (bls.gov)
A copy of the Bloomberg report can be downloaded from this link: 2024 Projected U.S. Tax Rates | Bloomberg Tax.