Every year, the federal government decides how much of your estate is not 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.⁽¹⁾

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.⁽²⁾

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 law 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 when planning for taxes in retirement. Contact us today to discuss your options.

Sources:

1) Adapted from IRS.gov

2) Adapted from Congress.gov

Disclaimer:

This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel before making important decisions regarding their business. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.