The IRS regularly introduces modifications to tax laws, and understanding them and their potential aftermath is crucial. One of the critical IRS update for 2025 may impact estate planning, those who inherit, and the amount of taxes to be paid.
The IRS’s 2025 revenue proposals include raising the top income tax rate, taxing capital gains at death, eliminating the stepped-up basis for capital gains, limiting the annual gift exclusion, reducing the estate and gift tax exemption amount, and limiting the generation-skipping transfer (GST) tax exemption. Understanding these potential changes is vital to maintaining confidence in your estate planning strategy. Here’s what to monitor as the proposals may become law.
Increasing the top tax rate.
One of the crucial proposals is the plan to increase the top income tax rate from 37% to 39.6% for individuals earning more than $400,000 per year. This change alone could necessitate reviewing and possibly adjusting an individual’s current estate planning strategy.
Taxing unrealized capital gains at death.
The IRS proposal suggests taxing unrealized capital gains at death. Currently, unrealized capital gains – the appreciation of assets not sold before death – are not subject to income tax. The new proposal intends to tax these gains, potentially creating a significant liability for estates with substantial appreciated assets.
Likewise, under the current law, inherited property receives a “stepped-up basis,” allowing the heir to avoid capital gains tax on the property’s appreciation during the decedent’s lifetime. The 2025 proposal aims to eliminate this benefit, significantly impacting estate plans structured around this provision.
Gift tax changes
This critical IRS update proposes to limit the annual gift exclusion, currently set at $15,000 per recipient. A reduction in the exclusion amount would prompt a reevaluation of gifting strategies within estate plans.
Also proposed is reducing the estate and gift tax exemption amount from the current historically high level of $11.7 million per individual. This significant reduction could increase the estate tax liability of larger estates.
Last, the proposed changes include capping the generation-skipping transfer (GST) tax exemption, which addresses transfers made to skip a generation, such as grandparent-to-grandchild transfers.
In conclusion, while the critical IRS updates are still in the proposal stage, their potential for enactment is significant. The scope of these changes would require careful examination and likely revision of numerous estate plans. It’s essential to seek guidance from financial, legal, and tax professionals experienced in estate planning. To understand how these prospective changes may impact your wealth preservation strategy.
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