IRS Makes MAJOR CHANGE – Which Again Benefits the Rich
(DailyDig.com) – Big news just landed for any family with significant wealth. The Internal Revenue Service (IRS) decided to alter one of its rules allowing rich people to have time to avoid paying federal taxes and making it even easier to do so. Here’s what the change means for some of America’s most affluent families.
Married couples with a high net worth sometimes use a strategy called “portability” when they expect to pay federal estate taxes after a spouses’ death. When two people form a legal union, each may be entitled to inherit the other’s person’s assets after they pass on. The surviving heir can take ownership over everything but may end up paying taxes on the estate’s total value.
Portability allows the living spouse to use up any Deceased Spousal Unused Exclusion (DSUE) exemptions ($12.06 million per person as of 2022) that remain available after settling or transferring the deceased’s estate. Taking advantage of these deductions does not typically interfere with or block access to the surviving partner’s own exemptions.
Individuals using the previous exemption could put off claiming these assets for two years. The IRS recently changed its portability rule, extending the filing deadline to five years. However, the five-year window is only open to the surviving spouse if the deceased’s estate wasn’t required to file an estate tax return after they passed on.
Heirs must apply a 40% estate tax on anything over the $12.06 million threshold. The new loophole allows surviving spouses to combine an individual exemption with unused amounts from their deceased partner’s DSUE, meaning a person can receive $24.12 million before any tax payments become due.
Those inheriting less than the $12.06 million threshold shouldn’t feel any pain from the change. Unfortunately, they aren’t likely to gain anything from it either.
Another alteration the IRS made was that as long as a person complies within the five-year window, it won’t require them to seek the agency’s guidance in the form of private letter rulings. Previously, inheritors needed to clear the delays through agency representatives via a series of written communications. If the survivor files within the new time frame, they can elect portability.
Certified financial planner Michael Whitty told CNBC that while an estate tax return can cost anywhere from $5,000 to $20,000 or more, the cost is minimal compared to the amount of money an individual would pay for the 40% tax on every million dollars they had in their net worth every year. The high dollar amount of the exemption will likely decrease to as much as $6.5 to $7 million in 2026 when a number of provisions within the 2017 Tax Cuts and Jobs Act expire. Whitty claims the current figure will adjust for inflation until that time.
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