Tax Update Gift Tax Changes Coming?


Some tax advisers are worried that the “golden age of gifting” may be ending soon after 2020.[1] The phrase “tax exempt gifting” refers to the different tax status of lifetime gifts (gift taxes are only based on the gift amount received) compared to inheritances (where the full value of the transfer at death is subject to the estate tax, if any, including the funds which will be used to pay the estate tax). The three tiers of tax-exempt gifting, in order of importance, begin with the $15,000 annual exclusion gift to anyone, which is always tax free and also paperwork free, if the spousal consent is not sought. The second tier is unlimited gifts for direct payments for tuition and medical expenses to anyone; these are always tax free. The third tier is the lifetime combined gift and estate tax exemption. At $11,580,000 in 2020, this third tier would be the most likely target for government tax strategists trying to raise extra revenue. However, all three tiers are theoretically in the crosshairs as they benefit the “wealthy.” Clients planning to make such gifts should move early in 2021, if these strategies are already in their plans for this year.

Government tax strategists call keeping more of your money a “tax expenditure.” According to the Tax Expenditure Budget for Fiscal Year 2021 from the US Treasury Office of Tax Policy,[2] four of the top ten tax expenditures for the years 2020 to 2029 are the exclusion of employer contributions for medical insurance premiums ($3.1T), the step-up basis of capital gains at death ($659B), the capital gains exclusion on primary residence home sales ($594B), and the deductibility of charitable contributions, other than education and health ($612B). The rest of us should look at this list as a congressional shopping list and plan accordingly. We’ve only been talking here about the existing tax system and possible changes to that. What about new methods and theories of taxation? We have one in the works: the competition among states to tax work from home with the collision of state-based “nexus” and “domicile” rules for the 2021 filing season (see QMP Summer 2020). If this applies to you, do your homework. Taking a conscious, documented position, even if aggressively for your own interest, will help persuade state tax bureaucrats that you may not be worth the fight. Also, the state of California is proposing a new wealth tax. “Assembly Bill 2088 proposes calculating a wealth tax based on current world-wide net worth each December 31.”[3] The new tax would apply over a ten-year period no matter where the taxpayer lives and to anyone who spent more than 60 days in California during a calendar year, and, at least initially, on net worth over $30 million.

The federal estate tax applies to the fair market value (“net worth”) of an estate once at the end of a lifetime. Planning for the event usually entails life insurance that pays out at death and helps pay any estate taxes due with liquid funds. An “annual death tax” calculation with no established source of liquid funds seems difficult. As the Wall Street Journal article points out, there is also the problem of the US Constitution, perhaps, prohibiting states from reaching across state borders to tax other states’ residents. A new wealth tax and issues of “nexus” and “domicile” may be the way they plan to generate this additional revenue. If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.

William H. Darling, CPA – Chairman & President
Jeanne M. FitzGerald, CPA – Tax Manager


[1] Financial Advisor Magazine, October 2020.
[2] Journal of Accountancy, January 2021.
[3] WSJ, 12/19-20/2020.
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