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The IRS released its proposed regulations on November 23 to include the increased basic exclusion amount (BEA) per the Tax Cuts and Job Acts (TCJA).

The BEA has been amended by the TCJA to increase the exemption to $10 million as adjusted for inflation from $5 million; for decedents dying, and gifts made after December 31, 2017 and before January 1, 2026. Thus for 2018 after the inflation adjustment effect, this would allow an individual or the individual's estate to shelter $11.18 million due to the increased BEA. This increase is set to expire in 2026 and concerns were raised on the effects of gifts made during the eight-year period where the taxpayer used some or all of the total BEA and later died after the exemption was reduced or gifts were made.

The proposed regulations addresses calculating the gift tax where a taxpayer gifts a portion of their increased exemption during the period between January 1, 2018 and December 31, 2025 and then continues to gift after January 1, 2026. When filing a gift tax return (Form 709), the taxes are calculated by adding all prior year's taxable gifts, computing the tax and then deducting the tax exemption amount. With the exemption scheduled to be reduced starting in 2026, it appeared there could be a tax liability due to the reduction of the exemption. The proposed regulations adjusts the computations so the taxpayer is only taxed on the additional amount of the gift being made in the taxable year of the gift. 

The proposed regulations also address calculating the estate tax where some or all of the exemption was used with prior taxable gifts so that there will not be any additional estate tax due to the reduction of the exemption scheduled to occur in 2026. They have identified one situation in which the increased BEA could cause an issue as a result of a decrease in the BEA starting January 1, 2026, but are proposing a provision that would correct this issue.

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