Every year the federal government decides how much of your estate isn’t subject to taxes when you die. This year, thanks to inflation, the 2021 estate tax exemption increased to $11.7 million.
This means, when you pass away, the value of your estate is calculated. Any amount more than $11.7 million is subject to the federal estate tax. A married couple has a combined exemption for 2021 of $23.4 million.
The estate tax isn’t a simple 40% on your taxable amount. The estate tax rate on anything exceeding $11.7 million is a progressive tax. It ranges from 18% to 39% for the first $1 million. Anything more incurs an additional 40% for anything over $1 million.
It’s worth noting the Tax Cuts and Jobs Act doubled the estate tax exemption in 2018. However, it also has an expiration date. On Jan. 1, 2026, the estate tax exemption will drop back to what it was before 2018: $5.6 million.
Without going too deep into President Biden’s proposed tax changes, he’s pushing for an individual taxation plan that would hit those with incomes above $400,00 hardest. The proposed top income tax rate increases the present law’s 37% rate to 39.6%. According to the White House, this increase affects only the top 1% of taxpayers. Further, his capital gains tax proposal likely affects taxpayers whose incomes exceed $1 million.
So, what might these taxes look like for you going forward? If Biden’s tax plan reducing the exemption to $3.5 million passes, consider offsetting your numbers. Specifically, you may want to gift earlier during retirement or use life insurance as an estate planning tool.
Tax changes are inevitable. Now might be the perfect time to talk through some financial options and review your long-term plans. Taxes are complicated, so you’ll want some professional guidance. Contact us today at 336-448-1086