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Estate Tax: 2022 and Beyond

After much speculation, waiting, watching, and more waiting, there still isn’t a final answer as to what will happen with the current Federal Estate Tax. As we have previously written, Congress is still in the midst of proposing and voting on potential tax law changes but have been relatively silent in recent months on potential changes to the Federal Estate Tax law.

So, as we continue to wait, we now move on to 2022 when the Federal Gift tax annual exclusion has been indexed for inflation to $16,000 per donee. And although NY doesn’t have a gift tax, any gifts made within 3 years of death are pulled back into the estate, subject to possible estate tax.

Additionally, the Federal estate tax exemption now indexed for inflation to $12,060,000. Estate values can be taxed as high as 40 percent on amounts in excess of these limits. Married couples can utilize what is known as the “portability” option to effectively double this amount. After the first spouse dies, the estate’s executor elects portability to pass any unused exemption to the surviving spouse.

However, New York residents should know that although this does help reduce Federal estate taxes, it will not help with the New York estate tax. New York is one of many states that still tax estates. The 2022 New York State estate tax exemption is $6,110,000 and continues to be indexed for inflation. You can see that there is a large taxation discrepancy between the New York estate tax and the Federal estate tax.

In addition to the taxability difference, New York also has two additional rules unfavorable to estates when compared to the Federal code.

  • First, the ability for surviving spouses to claim the portability option does not exist for the New York estate tax.
  • Second, there is what is known as the tax cliff. If the taxable estate exceeds 5 percent of that year’s exemption amount, $6,110,000 in 2022, there is no exemption, and the entire taxable estate is subject to New York estate tax.

So how does this work, and what can be done to mitigate this difference in taxability? There are a few popular ways of potentially reducing an estate value below $6,110,000. Deductions from an estate value can include items such as:

  • Prepaid funeral and administrative expenses
  • Charitable contributions
  • Credit shelter trusts to allow both spouses to keep the full exemption

Care also needs to be taken to avoid wasting one of the spouse’s estate exemptions. For your estate plan to work as you intend, the make-up of your assets and beneficiary designations need to align with your estate planning documents. You can have well-designed wills and still not have everything play out as you mean for it too intended.

If you would like more information on how to value your estate or ways to reduce the taxability of your estate, please contact one of our Bonadio Estate & Trust professionals.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.