2023 Tax Exemptions Are Largest Exemption Increases Ever
IRS – Annual Gifting Exclusion
The IRS just announced that the annual gifting exclusion amount – each person can pass to family per year without reporting it to the IRS on either side of the transaction – just shot up from $16,000 to $17,000.
The estate taxation threshold is going to be $12,900,000, up from $12,060,000 in 2022.
This is meaningful for those who have large estates and need to at least engage in estate freezing techniques. It is also meaningful for those who have previously capped out their lifetime gifting amount, who can now take a second bite at the apple. Anyone in this position should be consulting with their estate planning attorney in the coming months given that the current estate tax exemption, no matter how much its adjusted for inflation in 2024 and 2025, is set to expire and roll back down to $5,000,000. That number will also be adjusted to inflation but people should expect the exemption to be about 50% of what it currently is. And, with inflation and the strong dollar continuing, the problem could be compounded.
Annual Gifting Exclusion of $17,000
Keep in mind that a couple could each give $17,000 to each of their children, spouses of children and grandchildren. In an average family, that could mean moving hundreds of thousands of dollars without reporting it or using your lifetime gift exemption. That is excellent news for those who have accumulated enough wealth for their needs and may be focusing more on helping out next generations. The amount of wealth that can be transferred over a decade using this simple annual gifting exclusion is well over $1,000,000. Furthermore, all of the growth of the transferred wealth is out of the taxable estate of the giving generation. If this is timed right, for a mother and father who want to help their daughter, married, with three children, the parents could each pass $85,000 totaling $170,000 under the annual exclusion. They could make this gift in December and then a similar gifting in January of the next year totaling $340,000 of gifting in one week without even having to file a 709 Return with the IRS. These gifts do not have to be cash and they do not have to be directly to family, but could be gifts to trusts for family members, depending on the circumstances and the particular trust’s terms.
Estate Tax Exemption of $12,900,000
In short, this is not only the largest increase, but this is the largest exemption in history, save the one year there was no exemption cap. From 2022 to 2023 the exemption increased by $840,000. This may be one of the few benefits of the inflation spiral our country has experienced. Admittedly, this number helps the wealthy. But this large exemption helps those who may have taxable “paper” wealth and not millions sitting in the bank and brokerage accounts. Regardless of whether wealth is intangible, tied up in real property assets, or in easy to access accounts, it is all taxable according to the IRS. Now, with the increased exemption families with valuable family businesses, etc. can be taken off their balance sheets during their lifetimes and placed in the hands of a trustee or other family member. At the very least, this prevents any increase in wealth that will only increase the amount taxed at death, keeping in mind the estate tax is 40% of every penny above the exemption amount. Clients should also note that the exemption will be deceased by approximately 50% after 2025. The rare opportunity for planning can be demonstrated by this simple contrast:
In 2023, single Mr. X dies with $14,000,000 of assets. His family will pay $440,000 of estate tax by the time they file the 706 Estate Tax Return.
In 2026, single Mr. X does with the same sum in his estate. But, utilizing a likely exemption amount of $6,200,000 by adjusting for inflation, his family will pay $3,120,000.
Based on this contrast, I’d suggest Mr. X utilize some of his estate to hire bodyguards to ensure his heirs don’t expedite his exit prior to the expiration of the higher exemption on 12/31/25. Or, he could just engage the services of a well-seasoned estate tax planning specialist in the coming months to take advantage of the large exemption before its expiration.
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