By Allison M. Swanberg, CPA, MT – Tax Supervisor, and Elizabeth T. Nguyen – Tax Staff

When considering planning for gift and estate taxes, one must first start with a general understanding of how these taxes function.  When assets are transferred via gift or bequest, they may be subject to a transfer tax, which is the estate and gift tax.  Although they apply in different situations (i.e., on the estate of a decedent as it is distributed to beneficiaries or on gifts from one taxpayer to another), they are essentially the same tax.  However, not every gift or estate is subject to the tax; in fact, most gifts and estates will not be taxed.  The reason for this is the Basic Exclusion Amount, or Lifetime Unified Credit.

Every US citizen or resident taxpayer is entitled to a lifetime unified credit—also known as the Basic Exclusion Amount (BEA).  This can be thought of as a sort of ‘standard deduction’ but for the transferring of assets over a lifetime.  The exclusion amount is considered ‘unified’ because it applies to both gifts that are made during a taxpayer’s life as well as to the value of their estate at death.  If the cumulative amount of assets gifted by a taxpayer over their lifetime is less than the BEA, they will not have any gift tax liability.  Additionally, if the cumulative amount of lifetime gifts and the total value of their estate at their death combined is less than the BEA, then there will not be any estate tax due either.  Apart from the BEA, every taxpayer is also entitled to an annual exclusion amount for gifts, so that if the total gifts to a recipient each year are less than this amount, the gift will not be taxable and generally will not need to be reported.

Between 1980 and 2017, the BEA ranged from less than $200,000 to approximately $5.5 million.  In 2017, the Tax Cuts and Jobs Act (TCJA) increased the individual lifetime exclusion amount from $5 million to $10 million for tax years 2018 through 2025. After indexing for inflation, this exemption reached $13.99 million per taxpayer.  Originally, the increased TCJA exemption was scheduled to sunset at the end of 2025 and revert to roughly half of its current amount in 2026. However, the One Big Beautiful Bill Act (OBBBA) has made the higher exemption level permanent and raised it to $15 million per individual, effective January 1, 2026.

The annual gift tax exclusion is indexed for inflation and has increased from $18,000 in 2024 to $19,000 in 2025 and 2026. If the total annual value of a taxpayer’s gifts to a recipient exceeds the annual exclusion, it does not necessarily mean tax is owed, only that it must be reported on a gift tax return. Any gift value in excess of the annual exclusion amount will be subtracted from the donor’s lifetime BEA.  

As with prior years, the lifetime exclusion continues to be indexed for inflation, but 2026 will serve as the new base year for future adjustments. For married couples, the combined exemption will be $30 million, and the OBBBA maintains the portability provision. Portability allows a surviving spouse to use any unused portion of their deceased spouse’s basic exclusion amount.  To elect portability of the unused exclusion, the surviving spouse must file a Form 706 Federal Estate Tax Return indicating the election.

In addition to the federal changes, it is important for taxpayers to keep state-level tax considerations in mind. While the federal Basic Exclusion Amount has increased to $15 million per individual, many states impose their own rules with much lower thresholds. For example, Maryland and the District of Columbia both levy an estate tax with substantially smaller exclusion amounts, so an estate that is not taxable at the federal level may still owe tax to the state. On the contrary, Virginia does not impose an estate tax, offering a more favorable environment for wealth transfer planning. Other states, such as Pennsylvania, impose an inheritance tax, with rates that vary depending on the heir’s relationship to the decedent. Because these differences can materially impact overall planning, individuals should consider both federal and state laws and seek professional expertise.

The changes under the OBBBA present both opportunities and responsibilities for taxpayers.  While the higher lifetime exclusion may lower the risk for many taxpayers of incurring estate tax, individuals and families should review their estate plans to ensure they align with their goals, especially if their estate value is near or above the exclusion limits. If you are interested in creating a tax plan for your estate, reviewing your existing plan, or determining how the new tax laws may impact you and your family, reach out to your advisors at Thompson Greenspon for assistance and information.