As you consider your estate planning options for 2022, please be aware of some important federal tax updates. These updates include changes to the lifetime exemption amount, the annual exclusion amount and required minimum distributions from individual retirement accounts. Despite the flurry of legislative proposals in 2021, no changes have been made to the applicable federal tax rates for estates and trusts, federal estate tax portability, and step-up in basis.
1. Lifetime Exemption. As of January 1, 2022, based on the 2022 inflation adjustments, the federal gift and estate tax exemption amount and the exemption from generation-skipping transfer (GST) tax have increased from $11,700,000 to $12,060,000 ($24,120,000 for a married couple).
2. Annual Exclusion. As of January 1, 2022, also based on inflation adjustments, the federal gift tax annual exclusion amount increased from $15,000 to $16,000 ($32,000 for a married couple). The annual exclusion is the amount that an individual can annually transfer to another individual without using any lifetime gift tax exclusion or paying any gift tax.
3. Required Minimum Distributions. As of January 1, 2022, there are new life expectancy tables for determining required minimum distributions (RMDs) from IRAs and qualified retirement plans. These updates affect beneficiaries of inherited IRAs or qualified retirement plans, traditional IRA (non-Roth) owners who have reached their Required Beginning Date for taking RMDs, and qualified retirement plan participants who have reached their Required Beginning Date for taking RMDs.
1. Applicable Federal Tax Rates for Estates and Trusts. The highest federal estate tax, gift tax, and GST tax rate remains at 40%. The highest federal income tax rate for estates and non-grantor trusts is 37%, which applies to taxable income over $13,450 earned by an estate or non-grantor trust during its administration. Note that estates and non-grantor trusts are also subject to the 3.8% tax on net investment income.
2. Federal Estate Tax Portability. The option remains to transfer a decedent’s unused federal estate tax exclusion amount to a decedent’s surviving spouse by filing a federal estate tax return.
3. Step-Up in Basis. Generally, the income tax basis of property acquired from a decedent is adjusted to the fair market value of that property as of the date of the decedent’s death.
This update is intended to provide a brief summary of federal tax changes for 2022. If you have any questions, please consult with one of our attorneys.