The IRS has announced the 2023 estate and gift tax exclusion amounts. These reflect the high rate of inflation. If you have assets close to the exemption limits, you should consider taking advantage of the planning opportunities provided by these increases.
Annual Gift Tax Exclusion
Each year, the IRS sets the annual gift tax exclusion, which allows a taxpayer to give a certain amount per recipient tax-free, without using any of the taxpayer’s lifetime gift and estate tax exemption. The IRS has announced that the annual gift tax exclusion is increasing and will be $17,000 per recipient for 2023. This is up from $16,000 in 2022.
For married couples, this means that they can give $34,000/year ($17,000 per spouse) per recipient, beginning next year.
The gift and estate tax exemption are linked, meaning that the use of one’s gift tax exemption will reduce the amount one may leave at death estate-tax-free. If one makes gifts in excess of the annual gift tax exclusion, that person must file a gift tax return, due April 15 of the following year, to report the gift and track the amount of the lifetime exemption that has been used.
Lifetime Estate Tax Exemption
For gifts over and above the annual exclusion amount, each taxpayer receives a lifetime transfer tax exemption. This transfer tax exemption is unified for federal gift and estate taxes. In 2022, this amount was $12,060,000 per taxpayer. Due to inflation, on January 1, 2023, the unified exemption amount will increase to $12,920,000 per taxpayer.
Although the IRS has announced that the lifetime estate and gift tax exemption will increase to $12.92 million in 2023, that amount is set to be cut in half on January 1, 2026. The current exemption amounts were put in place by the Tax Cuts and Jobs Act of 2017, and are scheduled to sunset at the end of 2025. If no legislative action is taken, the federal exemption amount will be reduced to $5,000,000 per taxpayer, indexed for inflation.
Generation-Skipping Transfer Tax Exemption
The generation-skipping transfer (GST) tax applies when someone transfers wealth to a person more than one generation below the transferor’s generation. A classic example of a GST involves a grandparent who transfers assets directly to a grandchild or to a trust established for a grandchild’s benefit.
The GST tax is in addition to the federal gift or lifetime estate tax. It is not an alternate tax; it is a double transfer tax that depends on the age of the recipient. The amount is linked to the lifetime estate tax exemption. Therefore, the 2023 exemption is also $12,920,000. Similarly, the GST tax exemption is scheduled to sunset back to $5,000,000 after 2025.
Gifts to Non-US Citizen Spouse
Spouses who are both US citizens may transfer unlimited amounts to each other without incurring any gift tax. Gifts to a non-citizen spouse, however, are limited. Regardless of whether the non-US citizen spouse is a resident of the United States or not, the amount of tax-free gifts is limited to an annual exclusion amount. For the calendar year 2023, the first $175,000 of gifts to a non-US citizen spouse are exempt from the gift tax. This is an increase from $164,000 in 2022.
Maryland and DC Estate Tax Exemptions
The Maryland estate tax exemption remains at $5,000,000 per person. Like the federal estate tax exemption, it is portable between spouses. Maryland has no state gift tax. However, Maryland is one of the few states that imposes an inheritance tax on collateral heirs.
DC’s estate tax exemption was reduced to $4,000,000 per person in 2021, and was adjusted for cost of living to $4,254,800 in 2022. There is no provision for portability of the DC estate tax exemption between spouses. DC has no gift tax or inheritance tax.
If you have any questions or would like more information on the issues discussed in this Article, please contact any of our Estates and Trusts attorneys.