what will the federal estate tax exemption be in 2025

Jouse Heery

2 min read

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30-11-2024

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What Will the Federal Estate Tax Exemption Be in 2025? A Look Ahead

What is the Estate Tax? The federal estate tax is a tax on the transfer of assets from a deceased person (the "decedent") to their heirs. Only estates exceeding a certain threshold, known as the exemption amount, are subject to this tax. Understanding this exemption is crucial for estate planning.

The 2025 Exemption: A Looming Change

The Tax Cuts and Jobs Act of 2017 temporarily doubled the estate tax exemption. This increase, however, is set to expire at the end of 2025. Therefore, a significant reduction in the exemption amount is expected unless Congress takes action to extend or modify the current law.

What Happened in 2017 and After? Before 2018, the exemption amount was significantly lower. The 2017 act raised it dramatically. For 2023, the exemption amount stands at $12.92 million per individual. This means that estates valued at less than this amount are generally not subject to the federal estate tax. However, this high exemption will revert to a much lower level in 2025.

Projected 2025 Exemption Amount: The Uncertainty

Predicting the exact 2025 exemption amount is challenging. Without Congressional intervention, the exemption will revert to approximately half its current level. Based on inflation adjustments and the pre-2018 levels, a reasonable estimate would place the 2025 exemption amount around $6 million per individual. This is only an estimate, and it remains crucial to monitor legislative developments.

Understanding the Implications

A decrease in the exemption amount will significantly impact a larger number of families. More estates will be subject to the estate tax, potentially leading to increased tax liabilities for heirs and necessitating more proactive estate planning strategies.

• Increased Tax Burden: Many more families may find themselves facing a substantial estate tax bill.
• Need for Sophisticated Planning: Tax planning strategies, such as trusts and gifting, will become even more vital for those with estates exceeding (or approaching) the reduced exemption.
• Potential for Congressional Action: There's always the possibility of Congress extending or modifying the exemption before 2025, adding further uncertainty.

What Should You Do Now?

Given the upcoming change and the inherent uncertainty, now is the time to consult with a qualified estate planning attorney or financial advisor. They can help you:

• Assess your current estate plan: Evaluate your assets and determine your potential exposure to the estate tax.
• Develop a comprehensive strategy: Implement strategies to minimize your estate tax liability, such as gifting, charitable giving, and establishing trusts.
• Stay informed about legislative changes: Keep abreast of any changes to the estate tax laws that may affect your plan.

Beyond the Federal Exemption: State Estate Taxes

It's also crucial to remember that some states have their own estate taxes, which operate independently of the federal estate tax. These state taxes may have different exemption amounts and rules, further complicating estate planning. Your advisor can help you navigate these complexities.

Conclusion: Planning for the Future

The 2025 reduction in the federal estate tax exemption presents a significant change with substantial implications for many families. Proactive planning is essential to mitigate potential tax liabilities and ensure a smooth transition of assets to heirs. Don't delay; seek professional guidance to prepare for the future. Remember, this information is for general knowledge and doesn't constitute financial or legal advice. Consult with qualified professionals for personalized guidance.