On October 18, 2022, the Internal Revenue Service (IRS) announced adjustments to the federal gift and estate tax exemptions for inflation that will take effect for the 2023 tax year.[1] The exemptions were increased in accordance with the significant inflation rates seen over the past year.
The annual gift tax exemption sets a limit on the maximum value of a gift an individual can give without having to file a gift tax return or a Form 709. For the 2023 tax year, the exemption will increase from $16,000 to $17,000 per person. The annual exemption for a married couple will be $34,000. For example, if a married couple has three children and wishes to maximize annual gifting to them, each spouse can gift $17,000 per child and avoid the requirement of filing a gift tax return in 2023. Each child will receive $34,000 total ($17,000 from each parent) and the married couple will have gifted a total of $102,000 amongst all three of their children. If an individual or married couple exceeds this annual amount in a gift, they are required to file a gift tax return and the exceeding amount will be deducted from their lifetime gift and estate tax exemption.
The lifetime gift and estate tax exemption sets a limit on the maximum value of an estate that can pass to beneficiaries without incurring federal estate tax. For the 2023 tax year, the lifetime exemption will increase from $12,060,000 to $12,920,000 per person. Therefore, beginning in 2023, if there were no subtractions for gifts exceeding the annual gift tax exemption during life, no federal estate tax will apply to estates that are valued at or below $12,920,000.
Please note that this is a brief and general overview of concepts. Gift and estate tax planning can be complicated depending on the presence of certain circumstances and specific rules may apply depending on your situation. It is always encouraged that you seek advise from your trusted circle of professionals, including your estate planning attorney, regarding your specific situation.
[1] https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023