The IRS has recently announced that the 2023 Estate Tax Exemption will be $12.92 million, which represents a significant increase from the 2022 amount of $11.7 million. This exemption represents the amount of a decedent’s estate (including previously taxable gifts) that is exempt from estate tax. The increased exemption is $860,000 more than the 2022 amount and is the result of the rising high interest rates reflected in the rapid growth of the consumer price index.
The estate tax is a federal tax that is imposed on the transfer of assets of a deceased person to his or her beneficiaries. The estate tax is generally imposed on the fair market value of the assets that are transferred, minus any debts or liabilities of the decedent. However, with the increased exemption, more people will be able to pass on their assets to their loved ones without having to pay estate taxes on them.
The increased exemption is a result of the American Taxpayer Relief Act of 2012, which established a formula for adjusting the estate tax exemption for inflation. This means that the exemption amount is adjusted annually to reflect changes in the consumer price index. The 2023 exemption amount is the highest it has ever been, and it is likely to continue to increase in the coming years.
It's important to note that this increase in the estate tax exemption does not mean that estate taxes are eliminated entirely. Estates that exceed the exemption amount will still be subject to estate tax. It's also important to consult with a tax professional or attorney to understand how this change may affect your specific situation.
The 2023 estate tax exemption of $12.92 million presents an opportunity for married couples to protect up to $25.84 million from estate taxes through coordinated estate planning. This is because the estate tax exemption is unified with the federal gift tax exemption, meaning that by utilizing the exemption through lifetime gifting, the amount of exemption available at death is reduced. It's worth noting that the highest estate or gift tax rate remains at 40% for the next year.
Gifting Opportunities to Defer Taxes
The increased estate tax exemption for 2023 presents additional opportunities for gifting. The annual gift tax exclusion amount for 2023 is $17,000 per donee, an increase from the 2022 amount of $16,000. This means that taxpayers can gift up to $17,000 to each individual recipient without having to pay gift taxes or use any of their lifetime gift tax exemption. This tax exclusion applies to present interest gifts, which are gifts that the donee can enjoy immediately, such as cash or similar property, or gifts made to certain trusts.
For gifts made to non-US citizen spouses, taxpayers can gift up to $175,000 in 2023 before utilizing their Estate Tax Exemption. It's important to note that while gifts to US citizen spouses are unlimited, gifts to non-citizen spouses are not. The non-citizen spouse annual exclusion is a separate limit and it's not part of the general $17,000 per donee exclusion.
In addition to the annual gift tax exclusion, the increased estate tax exemption also provides an opportunity for taxpayers who have previously used all of their available exemption through lifetime gifting to give an additional $860,000 next year without incurring gift taxes. This can be a useful strategy for reducing the size of one's estate and potentially avoiding or minimizing estate taxes.
For married couples, the increased exemption means that they can give a combined $1.72 million without paying gift taxes. This is because the estate tax exemption is unified with the federal gift tax exemption, meaning that the total exemption for both individuals can be used for either estate or gift taxes.
The Future Exemption Amount
The estate tax exemption has been adjusted for inflation and updated annually since 2012, with a base set at $5 million. This base was doubled in 2017 and is effective for tax years 2018 through 2025. After 2025, the base will revert back to the original $5 million.
Given this, it is important to consider utilizing the larger exemption amount through estate planning before 2026. This could potentially help minimize or avoid estate taxes on the transfer of assets to beneficiaries.
Gift Tax Exclusion
The IRS has recently announced that the annual gift tax exclusion amount for 2023 will be $17,000 per donee, an increase from the 2022 amount of $16,000. This means that taxpayers can gift up to $17,000 to each individual recipient without having to pay gift taxes or use any of their lifetime gift tax exemption.
This tax exclusion applies to present interest gifts, which are gifts that the donee can enjoy immediately, such as cash or similar property, or gifts made to certain trusts. This is an opportunity for taxpayers to reduce the size of their estate and potentially avoid or minimize estate taxes.
For gifts to non-US citizen spouses, taxpayers can gift up to $175,000 in 2023 before utilizing their Estate Tax Exemption. It's important to note that while gifts to US citizen spouses are unlimited, gifts to non-citizen spouses are not. The non-citizen spouse annual exclusion is a separate limit and it's not part of the general $17,000 per donee exclusion.
It's important to consult with a tax professional or attorney to understand how these changes may affect your specific situation and to explore all the opportunities to reduce the size of your estate and minimize the taxes that may be due.
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