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How the 2021 Estate Tax Exemption may Affect You

| June 02, 2021
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Every year the federal government decides how much of your estate isn't subject to taxes when you die. This year, thanks to inflation, it increased to $11.7 million.

This means, when you pass away, the value of your estate is calculated, and any amount more than $11.7 million is subject to the federal estate tax. A married couple has a combined exemption for 2021 of $23.4 million.

The estate tax isn't a simple 40% on your taxable amount. The estate tax rate on anything exceeding $11.7 million is a progressive tax—18% to 39% for the first $1 million, then a flat 40% for anything over that.

It's worth noting that when the Tax Cuts and Jobs Act doubled the estate tax exemption in 2018, the change came with an expiration date. In this case, on Jan. 1, 2026, the estate tax exemption is set to drop back to what it was before 2018: $5.6 million.

Without going too deep into President Biden's proposed tax changes, he's pushing for an individual taxation plan that would hit those with incomes above $400,00 hardest. The proposed top income tax rate would increase the present law's 37% rate to 39.6%. According to the White House, this increase will affect only the top 1% of taxpayers. Further, his capital gains tax proposal would likely affect taxpayers whose incomes exceed $1 million.

So what might these taxes look like for you going forward? If Biden's tax plan to reduce the exemption to $3.5 million comes to fruition, consider offsetting your numbers by gifting earlier on in retirement or using life insurance as an estate planning tool.

Tax changes are inevitable, so now might be the perfect time to talk through some financial options and review your long-term plans. Taxes are complicated, so you'll want some professional guidance. Contact us today to discuss.

Adapted from IRS1

Adapted from Congress.gov2

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This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results.  Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.

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1https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
2 https://www.congress.gov/bill/115th-congress/house-bill/1/text

 

 

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