Time to Increase the Annual Gift Exclusion Amount?

IRC Section 2503(b) provides an exclusion from gift tax of any gift (other than a gift of a future interest in property) for the first $10,000 given to someone by the giver (taxpayer). This amount is adjusted annually for inflation and for 2025 and 2026 is $19,000. So, if you give $15,000 to your grandchild in 2026, no gift tax is owed and no gift tax return (Form 709) needs to be filed (unless there were gifts above the exclusion amount or of a future interest).

The OBBBA increased the estate and gift exemption amount at section 2010 to $15 million, adjusted for inflation after 2026. This is a very large figure and less than a third of one percent of people will die with over $15 million of assets.

But, if you gift $20,000 to your adult child in 2026 to help them buy a house or car (and let's assume the giver is single for simplicity), a gift tax return must be filed for the $1,000 above the gift exclusion. This person owes no gift tax, but instead must file to report they used $1,000 of their $15 million estate/gift exemption.

For the roughly 99.8% of people who will never have over $15 million of assets, what is the point of filing a Form 709?  And, filing a Form 709 also means you have to report all of your charitable contributions (no effect on your $15 million exemption - just a requirement for Form 709 - see page 2 of instructions, right column). And this is all extra processing for the IRS with no tax effect for the bulk of the returns. Of course, there likely are many gift tax returns not filed either due to unawareness of the requirement or because the giver knows they are unlikely to ever owe estate or gift tax (but these are not justifiable reasons not to file).

Well, the estate/gift tax exemption increased significantly in recent years, but the gift exclusion did not. For example, in 2000, the estate exemption was $675,000 and the annual gift exclusion was $10,000. [see helpful summary from Tax Foundation]  So, simple math means that from 2000 to 2026, the estate exemption increased 2,122% while the gift exclusion increased a mere 90%.  That is quite a difference!

Of course, if the gift exclusion had also increased 21.22 times (to $210,220), this would be a tremendous estate planning option for people who do have over $15 million of assets. But, what about at least doubling the gift exclusion amount?  The Joint Committee on Taxation can likely come up with a justifiable increase that will reduce the number of Forms 709 filed where the filer will never have $15 million to give away during life or at death, but not create a significant estate reduction tool for the few individuals who will ever owe estate tax today.

Also, the IRS has data on how many people may ever owe estate tax. Their Personal Wealth Study, prepared every three years, uses Form 706 (estate tax return) data "to estimate the wealth of the living population." Using the most recent data of 2019, when the estate exemption was $11,400,000, only about 206,000 individuals were estimated to have gross assets worth more than this amount. The breakdown:

• 113,249 estimated to have wealth between $11.4 and $20 million
•   72,012 with wealth between $20 and $50 million
•   20,209 with wealth of $50 million or more

The U.S. Census Bureau also reports on wealth. For 2023, the median household wealth was $191,100. One in 10 households had wealth of zero, while one is 10 households had wealth greater than $1.8 million.

Too bad they can't break this down into smaller increments in the top 10% because the variation in this group is quite wide. 

And one more gift tax change that I noted in my 2/9/26 blog post on Trump Accounts is to modify Section 530A to include a provision similar to Section 529(c)(2)(A)(i) to treat contributions to a Trump Account as a gift of a present interest (even through gifts to 529 and Trump Accounts are future interests). This will avoid the need to file a gift tax return (the $19,000 gift exclusion only applies to gifts of present interests). Seems like an easy legislative fix. Or perhaps the IRS can simplify this filing by allowing the giver to report this gift on a line added to the Form 1040 starting in 2026 rather than filing a Form 709 (contributions to Trump Accounts cannot be made until July 4, 2026) and not file a gift tax return unless there were other gifts that warrant that.

What do you think?

Dept. of Labor FLSA Ruling and New Overtime Deduction

The OBBBA added IRC §225 allowing a deduction of up to $12,500 ($25,000 if MFJ) for qualified overtime compensation. This pay is defined as paid under the Fair Labor Standards Act (FLSA) in excess of "regular pay". Only the excess is overtime and generally overtime is paid when an eligible worker works over 40 hours per week.

Some of the examples offered by the IRS in FS-2026-01 and Notice 2025-69 focus on a regular hourly pay rate such as $20 per hour and the overtime rate as 1.5 times that amount or $30 per hour with $10/hour constituting overtime pay.

But as illustrated in Department of Labor Ruling FLSA 2026-02 (1/5/26), regular pay might be an hourly rate increased by nondiscretionary pay. In this ruling, workers were paid $12/hour and qualified for overtime pay if they worked over 40 hours per week. The workers could earn additional compensation under a Safety, Job Duties, and Performance bonus plan. Under the FLSA, this is not a discretionary plan because terms are set out in a predetermined plan, which makes this bonus pay part of regular pay.

In the fact pattern, workers received $9.50/hour of nondiscretionary bonus pay making their regular pay rate $21.50/hour and overtime pay at 1.5 times regular pay or $32.25/hour.

Thus, under IRC §225(c), the qualified overtime compensation is $10.75/hour ($32.25 less $21.50). 

Note that if the worker or employer incorrectly assumes that regular pay is $12/hour, they would treat $20.25/hour as overtime compensation generating a deduction which would be too high ($32.25 less $12.00).

In weeks where there is no nondiscretionary bonus paid, the overtime pay amount will be different. Thus, employers need good records to be able to properly prepare Form W-2 for 2026 through 2028.

For 2025, employers were not required to, but were encouraged to let workers know their amount of qualified overtime included in their wages. For 2026 through 2028, employers must separately state the qualified overtime on the Form W-2. Without information from their employer for 2025, will workers be able to determine the correct amount of overtime pay?

Notice 2025-69 does mention regular pay increased by a nondiscretionary bonus but no further details or example are provided (see page 24).

This is a good example of complexity that can arise in using a non-tax law to define a tax term, and when the measure of overtime pay can vary from pay period to pay period.

What do you think?

Time Running Out To Claim Refunds Owed for 2022 - WHY?

Every year in mid-March, the IRS issues a news release about time running out to claim refunds owed to people for four year earlier where the statute of limitations is going to close on April 15. The latest is IR-2026-37 (3/20/26) stating that time is running out to claim $1.2 billion in refunds for 2022. The IRS has details on this to not only reach this figure, but they also have a table showing the refunds owed by state. 

I have blogged on this a few times before including in 2023 suggesting that a modern system should prevent this situation. For example, why not change the law to allow the IRS to issue the refund?  Some of these refunds likely are for people with wage withholding who did not know they had to file to get their withheld federal income taxes refunded when their income is below the filing threshold.

Some people who have not filed are also missing out on claiming a greater refund such as for the Earned Income Tax Credit.

Please see my March 2023 post for a few ideas on how to not have these refunds not get to the taxpayers they are owed to.

What do you think?

Tax Scams Continue to Grow; IRS Simplifies Reporting of Scams

https://www.irs.gov/pub/irs-pdf/p6138.pdf

In February, the IRS announced a new online reporting tool for suspected tax fraud, scams, and illegal activities. Smartly, the link is on the main page (in the dark blue line):

This month, the IRS released the 2026 Dirty Dozen list of various scams to watch out for, such as fake charities seeking your money, phishing to get you to click on links that enable the scammer to get information from you, AI-enabled robocalls impersonating an IRS employee, misleading tax advice on social media, and more.

For a list of the dirty dozen since the IRS started this in 2001, please visit my table. You'll see that a few have disappeared but most continue or have morphed into digital scams.

The IRS also created two nice posters (pubs) with a QR code to encourage people to report scams. I think that while the IRS or other law enforcement agencies might not find your scammer, with more information, they do find some and can alert the public to new scams and ways to avoid them.  These pubs are 6138 and 6139.

Something that has also changed is getting emails that clearly look suspect such as because they are poorly written with grammar and spelling errors. Well, scammers likely are using AI to write more grammatically correct, enticing looking emails and texts - we all need to be extra cautious.  When in doubt, don't click but instead find another way to verify if the information is valid, such as logging into the online account they are talking about (using your usual link rather than the one in the email), such as your IRS online account (or one I get frequently is that my Amazon account has been suspended (!) when it has not).

What do you think?  What more can be done to help people from being the victim of identity theft or falling for a tax scam such as claiming a bogus tax credit or giving money to scammers pretending to be the IRS or a state tax agency?

Minnesota Examines Tax Expenditures

Tax expenditures are special rules in a tax system that are not part of a "normal" tax. For example, special deductions, exclusions and credits in our Federal Tax system generally are tax expenditures. This includes the exclusion for employer-provided health insurance (the largest tax expenditure at $296 billion costs per year per the Treasury Department), step-up in basis at date of death ($40 billion per year per Treasury), mortgage interest expense, tip and overtime deductions, and vehicle loan interest deduction.

The federal income tax has over 100 special rules. States typically have more, particularly in their sales tax system that usually has numerous exemptions.  And many items of personal consumption that states do not tax do not get measured or identified as tax expenditures because they are not part of the state's statutory definition of the tax base. For example, California's sales tax applies to tangible personal property. So the fact that California doesn't impose sales tax on digital goods as textbooks and iTunes, isn't measured - which also masts who is getting tax savings.

Well, in 2021, Minnesota created the Tax Expenditure Review Commission consisting of legislators and the commissioner of revenue. They meet to evaluate the effectiveness of their state tax system's 327 special tax rules (tax expenditures). Apparently this past year they looked at 15 of these and made recommendations on their effectiveness and determined if changes were warranted. That is better than not looking at all, but out of 327, more seems needed.

But I applaud the lawmakers in Minnesota for creating the commission because tax expenditures result in lower revenue, and higher tax rates than would otherwise be needed without the special tax rules. They are spending that is easily overlooked in the state budget because only direct spending (sending money directly to an individual or business) is noted, not the spending this is done by lawmakers lowering your tax liability.

What do you think?