The Estate Tax Exemption has Been Raised for 2023

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.

financial-planning-investment-opportunities-1031-exchanges-DSTs-California

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.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

There is no guarantee that any strategy will be successful or achieve investment objectives;
Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
Potential for foreclosure – All financed real estate investments have potential for foreclosure;
Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits