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To keep up with inflation, the IRS has been increasing estate tax exemptions yearly as part of the Tax Cuts and Jobs Act (TCJA) that took effect in 2017. These increased exemptions are only temporary and are set to expire at sunset in 2025. The big question is, how will it affect you?

The tax reform law provides that the exemptions will revert to the pre-2018 threshold, amounting to only around five million dollars per individual. Once the exemption reverts back, your estate transfers and gifts will follow the reduced tax exclusions, which could lead to tax costs based on your circumstances.

Special conditions impacting estate and gift taxes

However, the IRS has a special rule to protect individuals using the increased tax exemptions to preserve their estates. It can allow you to calculate tax credits based on the higher exemption applicable when you made the gifts or the exclusion amount effective when you died.

Depending on the situation, this provision can ensure that the scheduled exemption reduction will not impact individuals who arranged transfers or gifts from 2018 to 2025. Still, an estate’s value could be volatile without adequate planning and preparation.

Planning to maximize tax benefits

Ideally, you can quickly sort out your estate and make gifts to maximize the increased exemptions and tax benefits. Unfortunately, most estates include diverse and unique assets, potentially making them challenging to organize.

If you want to make the most of the current exclusion amounts, it is best to seek legal counsel concerning your estate plan immediately. Preparing now can help prevent your estate from suffering losses due to the upcoming tax exemption cutbacks. Additionally, making an estate plan or updating it based on these developments can help avoid issues or disputes in the future.