The Trump tax law doubled the federal estate tax exemption for estates and gifts, allowing wealthy investors to pass on their financial legacy with big tax savings for their heirs. Many families work with a financial advisor to maximize an estate plan for their loved ones. Let’s take a look at how the estate tax could affect affluent investors and their beneficiaries.
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President Trump’s Estate Tax
As part of a larger tax initiative, President Trump and Congress pushed through a major overhaul of the federal estate tax in 2017. Before then, the estate tax exclusion was at $5.49 million. In 2021, the exemption limit by more than half to cover estates under $11.7 million. Anything below that threshold is exempt from estate tax altogether, and the exemption doubles to $23.4 million for married couples filing joint tax returns.
The highest marginal tax rate at which the estate tax applies tops out at 40%. That’s only slightly higher than the 39.6% maximum ordinary income tax rate. This rate applies to any additional estate assets that exceed the exemption limit. For example, if you pass away in 2021 and leave behind an estate valued at $12 million, the remaining $300,000 would be subject to the estate tax.
Related Article: 5 Ways the Rich Can Avoid the Estate Tax
How Wealthy Investors Benefit
One advantage of Trump’s estate tax for high net worth individuals is the opportunity to pass on more wealth to loved ones without having to pay taxes.
You should keep in mind, however, that if you sell an inherited estate for profit, you will have to pay capital gains taxes. But the basis or the value of the inherited property is set as of the date of death.
This means that if you inherit a house valued at the time of death at $600,000 and you sell it for $700,000, then you will have to pay capital gains taxes on the $100,000 difference.
For someone who has amassed a sizable amount of wealth, Trump’s tax plan may save money on estate taxes, but ultimately their heirs will inherit a built-in tax liability. They could avoid the capital gains tax if they as long as they hang on to the assets. But when they opt to sell, especially if the inherited property has appreciated substantially, they’re going to feel the tax bite at some point.
Related Article: 4 Ways to Minimize Capital Gains Taxes on Investments
The Trump Tax Plan raised the estate tax exemption level more than double from $5.49 million in 2017 to $11.7 million in 2021. The current limit is set to roll back to 2017 amounts in 2026. Wealthier investors may want to take advantage of the tax savings to pass on more wealth to their loved ones. But they should think carefully about future capital gains taxes to preserve and grow their wealth.
How to Save Money on Taxes
- A financial advisor can help you optimize a tax strategy to benefit your investment and retirement goals. SmartAsset’s free tool matches you with financial advisors in your area in just 5 minutes. If you’re ready to be matched, get started now.
- If you don’t know whether you’re better off with the standard deduction versus itemized, you might want to read up on it and do some math. Educating yourself before the tax return deadline could help you save a significant amount of money.
- Our annual roundup of the best tax filing software can help you get through this tax season as painlessly as possible.
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