Changes in Tax Laws and How They Can Impact Your Estate Plan In 2022

Changes in tax rules can affect your tax liability. Whenever a tax law change proposal is announced, you should revisit your estate plan and tweak it in order to limit your financial exposure.

With this thought in mind, let’s take a look at some tax law changes that experienced law firms in Sonoma County can affect your estate plan.

Federal Tax Exemption

The federal gift estate and gift tax exemption has climbed up from $11.7 million to approximately $12.06 million per person or $24.12 million for a married couple. This means that a person can give $12.06 million worth of assets during their lifetime without tax implications. The exemption will decrease to $5 million by 2025.

The generation skipping tax (or GST) exemption amount has also been increased to $12.06 million. The method used to calculate inflation on these exemptions has also changed. Now, the chained-CPI method will be used to calculate exemptions and inflation instead of the conventional Consumer Price Index.

Required Minimum Distributions

The gift tax exclusion amount has increased to $16,000 per person or $32,000 per couple. The good news is that the government will not claw back assets gifted between 2018 and 2025 that exceed $5 million.

In January, the new life expectancy tables came into effect. These tables can be used to determine required minimum distributions (or RMDs) from qualified retirement plans and IRAs. If you are a traditional IRA owner, qualified retirement plan participant or beneficiary of an inherited IRA, call our office and we’ll help you understand how to compute RMD for 2022.

The Rate of These Taxes Remain Unchanged

  • The top 37% income tax rate on ordinary income
  • The top 20% income tax rate on dividend income or long-term capital gains
  • The maximum 40% federal transfer tax rate

Other Rules, Exemptions and Deductions That Remain Unchanged

  • Probate cut off– California estate owners whose estate is less than or equal to $166,250 can avoid a probate. Estates whose value exceed the limit will go through probate if the owner dies without creating a revocable trust and transferring assets into it.
  • Federal estate tax portability- Surviving spouses of deceased estate owners will continue to be able to use their partners’ unused federal tax exclusion amount
  • Federal tax rates- The maximum gift tax, GST tax and estate tax rates remain unchanged at 40 percent. The maximum federal income tax rate for non-grantor trusts and estates levied- if the income earned by an estate or a non-grantor exceeds $13,450 is 37 percent

Johnston & Associates Law is a leading law firm in Sonoma County. We help our clients keep up with tax changes, paving the way for better decision making. To discuss your requirement with one of our attorneys, call (707) 545-6542.