From an Individual Perspective: What’s Not in the 2022 Inflation Reduction Act

Blog
August 29, 2022

On August 17th President Biden signed into law the $739B Inflation Reduction Act.

With many individual income and estate tax proposals having been floated by certain progressives seeking to “tax the rich,” it is noteworthy what is NOT in the Act:

In significant part, there are no changes to:
• Income tax rates for individuals
• Capital gains tax rates
• $10,000 cap on state and local tax claimed as itemized deductions.
• Estate (and gift) tax exemption
• Basis step-up for estate assets upon death

The current federal estate tax rate is 40%, imposed on assets above the estate tax exemption. The estate (and gift) tax exemption is still $12M per taxpayer for 2022 (or $24M for a married couple, with portability between spouses for unused exemption in the first estate). The exemption will decrease to about half of these amounts after 2025.

At the current exemption level, very few estates are subject to federal estate tax. State estate tax may apply, however, since state estate tax exemptions are lower.

Democrats had hoped to eliminate basis step up to fair market value for estate assets at death. Without basis step-up, an estate asset worth $10M with a pre-death basis of $1M would have retained its $1M basis, so that upon future sale of the asset, a $9M gain would be recognized.

Democrats also wanted to impose a date-of-death tax on the unrealized gain on estate assets. Using the foregoing example, the proposal was to tax the $9M of gain, even without an actual sale of the asset.

Planning:
Consider making 2022 gifts, to take advantage of the current federal estate (and gift) tax exemption, before it reverts in 2026 to its pre-2018 level. Doing this must be carefully weighed against the correlative loss of basis step-up.

Consider use of certain still-viable types of trusts to achieve estate tax savings, asset management, and asset protection.