Starting January 1, 2023, the IRS raised the federal lifetime gift tax exemption from $12.06 million to $12.92 million and increased the annual gift tax exemption from $16,000 to $17,000.
What is the annual gift tax exemption?
Each year, the IRS sets the annual gift tax exclusion which allows a taxpayer to give a certain amount ($17,000 for 2023) per recipient without reducing any of the taxpayer’s lifetime gift and estate tax exemption or requiring that it is reported to the IRS. For married couples, this means that they can give $34,000 per year per recipient without the IRS being notified of the lifetime gift. It is important to note that there is no tax imposed at the time of the gift whether it is made above or below the annual gift tax exemption. As an example, a couple may gift their three children and six grandchildren a combined $289,000 in 2023 without touching their combined lifetime gift and estate tax exemption which allows them to transfer a substantial amount of wealth without the requirement to report to the IRS. The strategy of making large lifetime gifts under the annual exclusion is also a smart tool to reduce their overall gross estate if they have substantial assets. Conversely, if that same married couple makes a gift of $134,000 to their one child then they would be required to file a gift tax return for the amount above the gift tax exclusion in that year.
What is the lifetime gift tax exemption?
If one gifts an amount that is above the annual gift tax exclusion, the individual will use a portion of his or her lifetime gift tax exemption. The gift and estate tax exemptions are linked, meaning that if an individual gifts more than the annual gift tax exemption then the lifetime gift and estate tax exemption will be reduced. Therefore this lowers the amount that one can leave tax free at death. If one makes a gift in excess of the annual gift tax exemption, one must file a gift tax return due by April 15th in the year following when the gift was made. The example of the $134,000 gift to a child would result in the married couple’s lifetime gift and estate tax exemption being reduced to $12.83 million in 2023.
The federal estate tax or sometimes referred to as the “death tax” consists of an accounting of everything you own or have certain interests in at the time of passing. The total of all of these items is called your gross estate. These items consist of cash and securities, real estate, insurance, annuities, business interests, and other assets. As a result of the 2023 increases, if an individual’s gross estate is less than $12.92 million (minus any reported gifts made during your lifetime above the annual gift exclusion), she or he will not have to pay any federal estate tax. However, if that individual dies in 2023 and has assets that are over the federal estate tax exemption (minus lifetime gifts), the IRS will impose a 40% estate tax on any assets owned in excess of the remaining lifetime gift and death exemption.
The federal estate and gift taxes are subject to change each year, and it’s important to stay up to date on the most recent estate and gift tax laws. If you want to learn more about strategies to reduce the size of your estate and minimize estate taxes, reach out to the attorneys at Sinclair Prosser Gasior and schedule your consultation today.