Inflation Brings Gift and Estate Tax Changes in 2023
Following a year of increased inflation, the IRS has released the new gift tax exclusion amount and the new gift and estate tax exemptions.
The annual gift tax exclusion is the maximum amount an individual can give to another individual in any given year without any federal estate or gift tax consequences. For 2023, the annual gift tax exclusion increases to $17,000 from $16,000 in 2022.
- This can be increased to $34,000 when gifts are made by each of husband and wife OR
- With proper planning and tax filings, either spouse can gift up to $34,000 to a single recipient.
For the estate of an individual who dies during 2023, the applicable estate tax exemption has been increased from $12.06 million to $12.92 million. This is also the amount of total taxable gifts an individual can make during their lifetime without paying any gift tax. However, the estate tax exemption is reduced by the amount of exemption used in making taxable gifts during life. The current exemption amount is scheduled to be reduced to approximately $6.4 million beginning in 2026; however, it is possible that Congress could enact legislation prior to 2026 to halt or accelerate the reduction or even reduce the exemption to a lesser amount.
Should Individuals Capitalize on this Opportunity Before Changes are Made?
Before the exemption is significantly reduced, individuals may want to consider making gifts to their family members to use up the increased exemption. If individuals make such gifts today, future reductions in the exemption amount will not increase future taxable estates according to the “anti-claw back” regulations issued by the IRS in 2019.
Whether families should make such large gifts depends on their financial and family circumstances rather than just to achieve estate and gift tax savings. Aspects to consider include:
- What effect will the gifts have on family dynamics?
- Can they afford to lose the income generated by the gifted assets?
- Is the estate tax savings worth losing date of death basis adjustments that otherwise would occur if the asset was held until death?
Weighing the Options
If the benefits of gifting outweigh the potential negative effects, the following assets should be considered for gifting:
- Assets that are expected to appreciate in the near term.
- An asset whose value has been depressed due to current adverse economic conditions, but is expected to rebound quickly as the economy recovers.
- Assets whose values are subject to valuation discounts, such as lack of marketability or lack of control.
Individuals who are residents of states that impose a state estate or inheritance tax should keep in mind that taking advantage of the expanded federal exemptions may not reduce their exposure to the taxes levied by the state.
If you have any questions about this, or would like to discuss how you can take advantage of gifting opportunities in your estate plan, please contact a member of our Trust and Estate Planning Group.
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