The 2026 Gift Tax
Exemption Sunset

The Tax Cuts and Jobs Act doubled the lifetime gift and estate tax exemption — but those provisions are scheduled to expire. Here is what changes, how much you could lose, and what to do about it.

Current Exemption

$15,000,000

per person (2026)

Projected 2026

~$7,000,000

per person (estimated)

Potential Loss

~$8,000,000

per person

Tax at Stake

~$3,200,000

at 40% rate per person

What Is the TCJA Sunset?

The Tax Cuts and Jobs Act of 2017 (TCJA) roughly doubled the lifetime gift and estate tax exemption from approximately $5.49 million to $11.18 million per person. This higher exemption has been adjusted for inflation each year, reaching $15,000,000 in 2026.

However, the TCJA provisions were enacted through budget reconciliation, which required a 10-year sunset clause. Unless Congress acts, the exemption will revert to its pre-TCJA level (adjusted for inflation) on January 1, 2026 — estimated at approximately $7 million per person.

For married couples, this means the combined exemption could drop from approximately $30,000,000 to roughly $14 million — a potential loss of $16,000,000 in tax-free transfer capacity.

Who Is Affected?

The sunset primarily affects individuals and couples with estates exceeding the projected post-sunset exemption of approximately $7 million per person ($14 million per couple). If your net worth is below these thresholds, the sunset may have minimal direct impact on your estate plan.

You should act now if:

Your individual net worth exceeds $7 million
Your combined marital estate exceeds $14 million
You have significant unrealized appreciation in assets
You have not yet used any of your lifetime exemption
You want to maximize wealth transfer to the next generation

The Anti-Clawback Rule

One of the most important protections for pre-sunset gifting is the IRS anti-clawback rule (Treasury Decision 9884, finalized November 2019). This rule confirms that gifts made while the higher exemption is in effect will not be retroactively taxed if the exemption later decreases.

What This Means

If you use $12 million of your exemption to make gifts before 2026, and the exemption drops to $7 million, you will not owe gift tax on the $5 million difference. The gifts are permanently protected. This is the foundation of the "use it or lose it" strategy.

Strategies Before the Sunset

Several strategies can help you take advantage of the current higher exemption before the potential sunset.

Direct Gifts to Family

The simplest approach: make outright gifts to children, grandchildren, or other beneficiaries. Cash, stocks, real estate, and business interests all qualify. Remember that gifted property carries the donor's cost basis (carryover basis), so consider the capital gains implications.

Irrevocable Trusts

Transfer assets to irrevocable trusts (such as Spousal Lifetime Access Trusts, or SLATs) to use the exemption while maintaining some indirect access to the assets. SLATs allow your spouse to be a beneficiary, providing a safety net if you need access to the funds.

GRATs and IDGTs

Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs) can transfer appreciation out of your estate with minimal or no gift tax cost. These are particularly effective for assets expected to appreciate significantly.

529 Plan Superfunding

Contribute up to $95,000 per beneficiary ($190,000 for married couples) to 529 education savings plans using the 5-year election. This uses five years of annual exclusions at once while keeping the funds in your control if needed.

Important Considerations

Before making large gifts, consider these factors carefully:

Carryover Basis vs. Stepped-Up Basis

Gifted assets carry the donor's cost basis, while inherited assets receive a stepped-up basis to fair market value at death. For highly appreciated assets, it may be better to hold them until death rather than gift them.

Liquidity and Financial Security

Only gift assets you can afford to part with. Irrevocable gifts cannot be taken back. Ensure you retain sufficient assets for your own retirement and lifestyle needs.

State Tax Implications

Connecticut has its own gift tax, and several states have estate taxes with lower exemptions. Large gifts may affect your state tax situation differently than your federal situation.

Frequently Asked Questions

What happens to the gift tax exemption in 2026?

The Tax Cuts and Jobs Act (TCJA) provisions that doubled the lifetime exemption are scheduled to sunset on January 1, 2026. If Congress does not act, the exemption will revert from approximately $13.99 million per person to roughly $7 million (adjusted for inflation). This means individuals who have not used their exemption could lose approximately $7 million in tax-free gifting capacity.

Will gifts made before the sunset be clawed back?

No. The IRS issued final regulations (Treasury Decision 9884) confirming the anti-clawback rule. Gifts made while the higher exemption is in effect will not be retroactively taxed even if the exemption drops. This means gifts made before January 1, 2026 are permanently protected.

How much exemption could I lose if I don't act before 2026?

If the exemption drops from $13.99 million to approximately $7 million, you could lose roughly $7 million in tax-free gifting capacity. For a married couple, the combined loss could be approximately $14 million. At the 40% gift tax rate, that represents up to $2.8 million in potential tax on gifts that could have been made tax-free.

Should I make large gifts before the sunset?

This depends on your individual financial situation, but many estate planning professionals recommend considering large gifts before the sunset. The anti-clawback rule means gifts made now are protected even if the exemption drops. However, you should only gift assets you can afford to part with, and you should consider the income tax implications (carryover basis vs. stepped-up basis at death).

Could Congress extend the higher exemption?

It is possible but uncertain. Congress could extend the TCJA provisions, make them permanent, or allow them to sunset. Political dynamics, budget considerations, and election outcomes will all play a role. Most estate planning professionals recommend planning for the sunset rather than hoping for an extension.