The Tax Cuts and Jobs Act temporarily doubled the federal gift and estate tax exemption through 2025. Adjusted for inflation, the exemption currently allows an individual to transfer up to $11.58 million free of federal gift or estate tax. Married couples can shield up to $23.16 million from those taxes. These sizable exemption amounts create an attractive opportunity to minimize taxes on your wealth by gifting business interests or other assets to family members before they drop to their previous levels of $5 million and $10 million, respectively (adjusted for inflation) on January 1, 2026.

Some affluent families have been reluctant to take advantage of this opportunity for fear of a "clawback." In other words, there was a risk that a portion of their pre-2026 gifts may be clawed back and subject to estate taxes if the exemption amount is lower when they die. Although Congress did not appear to intend such a result, a literal reading of the tax code suggested that previous gifts could be added back into one's estate and subject to tax based on the exemption amount in effect in the year of death. Fortunately, IRS regulations finalized in November 2019 provide assurances that this would not happen.

Time for a cost segregation study?

Is your business planning to acquire, construct or substantially improve a building? Did it do so during the last several years? If so, consider a cost segregation study. These studies identify building costs that are properly allocable to tangible personal property rather than real property. And this allows your business to accelerate depreciation deductions, reduce taxes and boost cash flow. Cost segregation studies are particularly valuable now because they can enhance the benefits of bonus depreciation, which allows you to immediately deduct 100% of the cost of qualifying assets placed in service after September 27, 2017, and before January 1, 2023 (after 2022, bonus depreciation will be phased out over four years).

Related Read: Make the Most of Bonus Depreciation With Cost Segregation Studies

Watch out for audit red flags

The chances of being audited by the IRS have been shrinking in recent years, down to only 0.45% for the 2019 fiscal year. But there are several red flags that can increase the probability of IRS scrutiny. Examples include filing Schedule C for a business (especially if it includes significant income or large home office deductions), taking higher-than-average deductions, claiming significant rental losses, writing off "hobby" losses, claiming 100% business use of a vehicle and taking large deductions for business meals and travel.

Originally Published by Ostrow, December 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.