Increases to 2023 Estate and Gift Tax Exemptions Announced
The American Taxpayer Relief Act of 2012 (ATRA) was the first piece of legislation to set a permanent estate tax and gift tax exemption (“exemption”). The exemption is the amount of wealth a person can shelter from estate tax on transfers at the time of their death or during their lifetime. Lifetime gifts in excess of the annual exclusion amount will reduce the available exemption amount. At passage, ATRA set the exemption at $5,000,000 per person, indexed for inflation. Five years later when the Tax Cuts and Jobs Act of 2017 (TCJA) was passed, the exemption almost doubled to $11,180,000 per person. That amount has been annually adjusted upward for inflation, and in 2023, the new exemption amount is set to be $12,920,000 per person and $25,840,000 per married couple. This is a substantial increase from the $12,060,000 ($24,120,000) amount of 2022, and welcome news for those individuals or families who may now have additional planning opportunities to transfer wealth and shelter assets from estate taxes.
Moreover, the annual gift tax exclusion is set to rise from $16,000 per donee in 2022, to $17,000 per donee in 2023. This means that any individual can give up to $17,000 to any other person(s) without incurring gift tax consequences or reducing their remaining exemption. Married couples can also gift-split and effectively gift $34,000 to any donee. This is a tried-and-true method of passing wealth to others in a tax efficient manner and is in addition to any taxable gifts utilizing exemption. For example, if an individual has already used all of their $12,060,000 exemption, as of January 1, 2023, they could gift an additional $860,000 (utilizing the increased exemption amount) and make as many $17,000 gifts to individuals as they would like without any gift tax concerns. All of these funds would also be removed from their estate for estate tax purposes.
The TCJA is set to sunset at the end of 2025. Therefore, if Congress does not proactively take action to extend the current increased exemptions, as of January 1, 2026 the exemption will revert to the ATRA level of $5,000,000, indexed for inflation. This amount is expected to be in the mid to high $6,000,000 range. In light of this potentially time limited opportunity, individuals and families should work with their trusted advisors to finalize any 2022 gifting under current exemption amounts and determine if additional gifting in 2023 is advantageous for their situation.