Gift and Estate Tax Exemption Increases Substantially for 2023

The transfer of money, property, and other assets can be subject to gift and estate taxes, which only apply to significant gifts given during one's lifetime or large sums left to heirs upon death. The gift and estate tax exemption refers to the amount that a person can transfer without incurring taxes on the transferred assets.

There's good news for those concerned with gift and estate taxes - the exemption amounts have increased significantly for 2023, having been indexed for inflation. In 2022, the federal gift and estate tax exemption amount stood at $12.06 million per person. However, starting January 1, 2023, the exemption amount rose to $12.92 million per person, marking an increase of $860,000. For married US citizens, the exemption amount increase doubles to $1.72 million.

If a person has already exhausted their estate and gift tax exemption as of December 31, 2022, they can make additional tax-free gifts in 2023, up to an amount of $860,000, which represents the increase from 2022 to 2023. Similarly, a married couple with no remaining exemption as of the end of 2022 can make additional gifts in 2023 of $1.72 million without incurring any federal estate or gift tax liability. However, the gift and estate tax exemption is scheduled to decrease to roughly half the amount at the end of 2025.

Planning

It is important to plan ahead and consider taking advantage of the increased exemption amounts before the scheduled decrease at the end of 2025, as mandated by the Tax Cuts and Jobs Act (TCJA). This law, which doubled the gift and estate exemption amounts in 2018, will remain in effect until December 31, 2025, subject to change by Congress. After 2025, the exemption amounts will revert to the base exemption amounts (including an adjustment for inflation) that existed prior to the passage of the TCJA, which was $5 million.

Fortunately, individuals who take advantage of the increased gift tax exemption amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exemption amount is set to decrease. The IRS has clarified that estate tax credit can be computed using the greater of the exemption amounts applicable to gifts made during one's lifetime or the exemption amounts applicable on the date of death.

To take advantage of the increased exemption amounts, individuals and couples can make lifetime gifts either directly to an individual or in a trust. By making these gifts, they can reduce estate tax while the exemptions are favorable. For those who have already used their gift and estate tax exemption in prior years, the increase from 2022 to 2023 presents an excellent opportunity to make additional lifetime gifts to avoid or reduce estate tax.