The new year and a new administration are upon us, and with them will likely come some changes to the way our government collects taxes. It’s possible that the coming years will see an increase in the amount of taxes you’ll have to pay if you’re trying to give away your money to your friends and family members, both during your life and after your death.
Let’s explore some of the steps you can take to make sure that more of your hard-earned wealth makes it into the hands of your loved ones.
How are tax exemptions likely to change in 2021 and beyond?
When you pass away, your estate will be left to your beneficiaries according to the directions you leave in your will. If you pass away without a will, a court will decide who your heirs are, and distribute your money to them.
If the amount of money you distribute through your will reaches a certain threshold amount, the government can start collecting a portion of that money, which is the “estate tax.” The amount of money your estate can give away before the estate tax kicks in is an “exemption.”
The amounts of these exemptions often change, depending on the current policies of the IRS and acts of Congress. In 2020, the exemption for estate taxes was $11.58 million, and in 2021 it’s increasing to $11.7 million. What that means is that you can leave up to $11.7 million in your will directly to your loved ones without any of it being lost to additional taxes.
However, the incoming administration has proposed lowering the estate tax exemption back to what it was in 2009, which is $3.5 million. That means that, unless you find another way of giving your money away before that change takes place, the IRS will tax anything above that amount that you give through your will.
What can I do to make sure more of my money goes to my loved ones?
Much like the estate tax, there is also a gift tax that comes into play after you give away a certain amount of money to someone during your lifetime. For now, this amount is $15,000 per recipient, per year.
In other words, if you know that you want your money to go to your three children when you pass away, you could start to give them each $15,000 every year, and you won’t have to pay any additional federal taxes on those gifts.
If you are concerned with your estate going over the estate tax limit, this could be a good way of making sure that more of your wealth reaches your loved ones’ hands, rather than the IRS’s.
It can be upsetting to think of a big chunk of your hard-earned wealth being consumed by taxes before it reaches your loved ones after you pass away. By taking advantage of the gift tax limits while you’re still alive, you can ensure that your money reaches its intended recipients.