The IRS has recently announced many 2020 Tax Updates. The inflation adjustment announcement can be found in Revenue Procedure 2019-44. This includes increases to the federal estate and gift tax exemption limits and increases to the contribution limits to retirement plans. The 2020 Tax Update also increases the income threshold for a small business to be eligible for a 20% deduction under 199A.
Change in Federal Estate and Gift Tax Exemptions
- Old 2019 Exemption Limits: $11.4 million exemption per person
- New 2020 Exemption Limits: $11.58 million exemption per person (an increase of $118,000)
- This is a combined federal gift and estate tax exemption limit. Accordingly, if you gift away $5M, your remaining estate tax exemption would be $6.58M.
Change in Gift Tax Exemption for Non-Citizen Spouse
- Old 2019 Limit: $155,000 exemption for annual gifting to a non-citizen spouse
- New 2020 Limit: $157,000 exemption for annual gifting to a non-citizen spouse
- Gifts to a non-citizen spouse in excess of this threshold count against your lifetime gift and estate tax exemption, so be careful not to gift too much to a non-citizen spouse without consulting a tax professional.
Increase in Contribution Limits to Retirement Plans
- Affects 401(k), 403(b), and some 457 plans
- Old 2019 Contribution Limits: $19,000 per person
- New 2020 Contribution Limits: $19,500 per person (an increase of $500)
No Change in Annual Exclusion Gifting Threshold
- The annual exclusion gifting threshold remains unchanged at $15,000 per person per donee.
- Annual Gifts in excess of the $15,000 threshold count against your $11.58 million dollar lifetime limit. So, in the example above, if you gift away $5M, but do it to your many children and grandchildren over 2 decades in amounts less than the annual exclusion, it will not count against your $11.58 million estate tax exemption limit
Increase in 199A Deduction for Small Business Owners
- Old 2019 Income Limit for full 20% deduction:
- $321,400 for married couples.
- $160,725 for married couples filing separately.
- $169,700 for individuals.
- See Rev. Proc. 2018-57
- New 2020 Income Limit for full 20% deduction:
- $326,600 for married couples.
- $163,300 for single persons and married couples filing separately.
Threshold for Requirement to Report Foreign Gifts
- Old 2019 Limit: Gifts of over $16,388 must be reported
- New 2020 Limit: Gifts of over $16,649 must be reported
Understanding the 2020 Tax Updates and Tax Thresholds Will Help You With a Planned Gifting Strategy
Keeping abreast of the changing gift and estate tax thresholds is an important way to maximize any Planned Gifting strategy. An increase in tax exemptions allows you to pass on more assets to your heirs in a tax efficient manner. To discuss how these changes may affect your plan, please contact one of our estate planning attorneys at The Pollock Firm LLC. Remember though, many of these exemption limits sunset in 2026.