2021 Increase to Federal Transfer Tax Exemption

The IRS increased the 2021 federal estate and gift tax exemption to $11,700,000, up from $11,580,000 in 2020.  The IRS announced the increase, along with a variety of other adjustments, in Rev. Proc. 2020-45.

This increase to the federal exemption amount means that estates of individuals who die in 2021 with combined assets and prior taxable gifts in excess of $11,700,000 must file federal estate tax returns, and federal estate tax may be due.  With proper estate and tax planning, the federal exemption amount for married couples is essentially double the individual exemption, or $23,400,000 under 2021 law.

Since 2012, the IRS has increased the federal exemption amount each year to adjust for inflation (besides in 2018, when the federal exemption amount doubled under the Tax Cuts and Jobs Act of 2017).  Below is a list of the historical federal transfer tax exemption amounts:

Past Federal Transfer Tax Exemption Amounts

Year(s) Exemption
2004-2005 $1,500,000
2006-2008 $2,000,000
2009 $3,500,000
2010-2011 $5,000,000
2012 $5,120,000
2013 $5,250,000
2014 $5,340,000
2015 $5,430,000
2016 $5,450,000
2017 $5,490,000
2018 $11,180,000
2019 $11,400,000
2020 $11,580,000
2021 $11,700,000

The tax rate for assets owned by an individual in excess of the $11,700,000 exemption amount remains at 40%, which is unchanged from 2020.

There was no change in 2021 to the $15,000 federal annual exclusion amount for gifts.  As in 2020, in 2021 an individual may gift up to $15,000 to any person without federal gift tax consequences, meaning that the gifts are gift-tax free and no gift tax return is required.  Married couples may gift up to double that amount ($30,000) to any one person in 2021 without federal gift tax consequences.

Each person’s specific circumstances will determine whether federal estate and/or gift tax planning is appropriate.  Because it is likely that the federal estate and gift tax exemption will decrease significantly under the Biden administration (with some Biden proposals indicating that the exemption may decrease to as low as $3,500,000 per person), now is a good time to review your estate planning documents and consider additional federal tax planning options.

If you have any questions about the federal estate and gift tax exemption and how it may impact your estate planning, please contact an attorney in our estate planning practice group, including Ryan Montgomery (rmontgomery@montgomerypurdue.com) or Allison Int-Hout (ainthout@montgomerypurdue.com).