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. Thus, beginning on January 1, 2023, a married couple can transfer a combined $25.84 million of wealth, free of gift and estate tax.
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 generation-skipping transfer (“GST”) tax exemption will also increase to $12.92 million. An individual may place assets having a value up to the exemption amount into a trust during lifetime and/or at death and allocate their GST tax exemption to such trust. In doing so, the assets could remain in the trust for generations without any gift, estate or GST tax due on the trust distributions or upon the trust’s termination.
The increased exemption amounts are based on an increased $10,000,000 exemption, as adjusted for inflation. However, under current law, the 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.
If you have questions regarding how you can benefit from the increased gift tax annual exclusion and the increased gift, estate and GST tax exemptions or how you can “lock-in” the $12.92 exemption amounts before they are reduced in 2026, contact your Vorys estate planning attorney.
As an expert in tax law and estate planning, I've closely followed the recent developments in the Internal Revenue Service's annual inflation adjustments for tax year 2023. My in-depth knowledge and understanding of these changes allow me to provide you with valuable insights into the implications of these adjustments, especially in the context of wealth transfer tax planning.
Let's break down the key concepts mentioned in the article:
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Gift Tax Annual Exclusion Increase:
- The IRS has increased the gift tax annual exclusion to $17,000 per recipient in 2023, up from $16,000 in 2022.
- This means that individuals can make non-taxable gifts of up to $17,000 to any recipient on an annual basis.
- Married couples who elect to gift-split can jointly gift a combined $34,000 per recipient without incurring gift tax.
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Combined Gift and Estate Tax Exemption Increase:
- The combined gift and estate tax exemption for individual taxpayers will rise from $12.06 million in 2022 to $12.92 million in 2023.
- This exemption covers the total amount of gifts an individual can make during their lifetime, along with transfers made at death, without incurring gift or estate tax.
- As of January 1, 2023, a married couple can transfer a combined $25.84 million of wealth free of gift and estate tax.
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Additional Gifts for Those Who Exhausted Exemption in 2022:
- Individuals who utilized their entire combined exemption in 2022 can make additional tax-free gifts of $860,000 as of January 1, 2023.
- Married couples with no exemption remaining from 2022 can make additional gifts totaling $1.72 million without incurring gift or estate tax liability.
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Generation-Skipping Transfer (GST) Tax Exemption Increase:
- The GST tax exemption will also increase to $12.92 million.
- Individuals can place assets up to this exemption amount into a trust during their lifetime and/or at death, allocating the GST tax exemption to the trust.
- Assets in the trust could potentially remain tax-free for multiple generations upon distributions or termination.
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Scheduled Reversion of Exemption Amounts in 2026:
- The increased exemption amounts are based on a $10,000,000 exemption adjusted for inflation.
- However, under current law, these exemption amounts are set to revert to $5,000,000, adjusted for inflation, on January 1, 2026.
- Planning strategies are available to "lock in" the higher exemption amounts before the anticipated reduction in 2026.
In conclusion, these adjustments present significant opportunities for individuals and couples engaged in wealth transfer tax planning. Understanding the intricacies of these changes and implementing appropriate strategies can help maximize the benefits before potential reductions in 2026. If you have specific questions or need personalized guidance, it is advisable to consult with a qualified estate planning attorney, such as a Vorys estate planning attorney, to ensure compliance and optimize your financial planning.
