For years, I have been writing about the federal estate and federal gift tax, and my message has been fairly consistent—Most people don’t have to worry about these taxes. Until recently, a good number of people had to worry about New Jersey’s estate tax. (New Jersey does not impose a gift tax.) But with recent changes in the laws governing New Jersey’s estate tax and even more recent changes to the federal estate and gift tax, I think it is finally safe to say the estate and gift tax are dead.
At the beginning of 2017, New Jersey changed its estate tax laws. The exemption equivalent amount against the estate tax was increased for the year 2017 from a paltry exemption amount of $675,000 to a more robust amount of $2,000,000. This meant that if you died in 2017, the value of your estate would have to exceed $2,000,000 before your estate had a chance of paying New Jersey estate tax.
With the ringing in of the New Year, New Jersey’s estate tax is now completely repealed. In short, there is no New Jersey estate tax, irrespective of the value of your estate. New Jersey continues to have an inheritance tax, but the inheritance tax is only imposed if you leave a portion of your estate to someone other than a spouse, parent, child, grandchild or other lineal descendant.
Recently, as part of the federal reform of the tax code, the exemption equivalents against federal estate and gift taxes were doubled. In addition, the exemption amounts have been indexed for inflation for many years, so the New Year brought an inflationary increase to the exemption equivalent.
Without the recent change in the tax code, the lifetime exemption equivalent against federal estate tax increased to $5,600,000 for an individual and $11,200,000 for a couple. With the doubling of these exemptions under the new tax law, a single person would now have to have an estate in excess of $11,200,000 before his estate would pay estate tax. A couple would have to die with more than $22,400,000 before their estate would pay estate tax.
In plain English, what this means is, if you are single and if you are worth less than $11,200,000 (hint: This would be just about every United States citizen except for about .1%), then there is no chance your estate will pay federal estate tax. And since there is no New Jersey estate tax, this means that if your estate is worth less than $11,200,000, your estate will not pay any estate tax.
If you are a married couple, you can easily shelter $22,400,000, assuming the $11,200,000 exemption is insufficient to cover your vast estate. A federal estate return would need to be filed after the death of the first spouse and the surviving spouse would merely have to check a box to preserve the deceased spouse’s $11,200,000 exemption.
What about gift tax? There is no New Jersey gift tax. There is a federal gift tax. The annual exclusion amount against the gift tax increased from $14,000 to $15,000 for 2018, but the annual exclusion amount is only half the story.
People often come to me and say something such as, “I thought I could only give $14,000 a year.” The truth is, you can give any amount of money that you like. The first $15,000 (for 2018) qualifies as an annual exclusion gift. This means that if you gift no more than $15,000, your lifetime exemption against gift tax, which is now $11,200,000, will not be reduced.
If you gifted $16,000, then your lifetime exemption would be reduced to $11,199,000. At a minimum, you would have to gift more than $11,200,000 before you ever would pay gift tax. If you don’t have more than $11,200,000, then I wouldn’t worry about gift tax. So, yes, technically, there still is a federal gift and estate tax, but if you are worth less than $11,200,000, neither tax affects you.
While estate and gift tax laws continue to evolve, they no longer affect the vast majority of families. Understanding which taxes still apply can help you make informed estate planning decisions and avoid unnecessary concerns.