IRS Announces Increased 2023 Gift Tax Annual Exclusion, Gift, and Estate Tax Exemptions

The Internal Revenue Service recently released the annual inflation adjustments for tax year 2023, which include welcome increases for wealth transfer tax planning.

The gift tax annual exclusion will increase for the second year in a row, rising to $17,000 per recipient in 2023 (up from $16,000 in 2022). This means that, beginning on January 1, 2023, an individual may make gifts in an amount up to $17,000, in total, on an annual basis to any recipient without making a taxable gift, and married couples who elect to gift-split may annually gift a combined $34,000 per recipient without making a taxable gift. For example, an individual with four (4) children may give each child a total of $17,000 in 2023 on a non-taxable basis, and a married couple with four (4) children may give each child a total of $34,000 in 2023 on a non-taxable basis.

In addition, the combined gift and estate tax exemption available to each individual taxpayer will increase substantially: from $12.06 million in 2022 to $12.92 million in 2023. The combined gift and estate tax exemption represents the total amount of gifts an individual may make during their lifetime, together with transfers made at death, before incurring gift or estate tax.  This means a husband and wife with proper planning could transfer $25.84 million estate, gift and GST tax free to their children and grandchildren in 2023. If no new tax law is passed, the increased exclusion amounts are scheduled to expire on December 31, 2025, which would mean a reduction in the exclusion amounts to $5 million plus adjustments for inflation.

For individuals who have used their entire combined exemption at the end of tax year 2022, such individuals may transfer, as gifts, an additional $860,000 tax-free as of January 1, 2023. A married couple with no exemption remaining as of the end of 2022 may make additional gifts of $1.72 million without gift (or estate) tax liability.

The New York exclusion amount was changed as of April 1, 2014, and does not match the federal exclusion amount. In 2022, the New York exclusion amount is $6.11 million. The 2023 New York exclusion amount has not yet been determined. It is important to note that, unlike the Federal exclusion amount, the New York exclusion amount is not portable, meaning if the first spouse to die fails to utilize his or her full exclusion amount, the surviving spouse will not be able to utilize the first spouse to die’s unused New York exclusion amount.

Under current federal law, the estate and gift tax exemption amounts are scheduled to revert to $5,000,000, as adjusted for inflation, on January 1, 2026. Thus, in 2026, it is anticipated that the exemption amounts will revert to approximately $7,000,000. However, there are a variety of planning strategies available to “lock in” the higher exemption amounts before they are reduced. Contact us to explore the strategies.

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