Estate & Gift Tax (and GST) Exemption Amount for 2023
A little over five years ago, the exemption (or “exclusion”) amount for
federal estate, gift, and generation-skipping tax (“GST”) was slated to
increase slightly from the prior year, to $5.6 million per person for
2018. This amount suddenly nearly doubled (to $11.18 million
for 2018) when the Tax Cut and Jobs Act of 2017 was enacted. For
2023, with inflation adjustment, this amount increases to $12.92 million
per person (up from $12.06 million in 2022, and potentially offering a
$25.84 million exemption for a married couple). This is the
“unified exemption amount” for the sum total of a person’s “lifetime
gifts” (gifts in excess of the applicable annual exclusion amounts in
effect when the gifts were made), together with the property passing to
beneficiaries upon the person’s death. This figure also represents the
current exemption amount for generating-skipping gifts (e.g., gifts to
grandchildren). Estates (and/or lifetime gifts) in excess of the
exemption amount are taxed at a maximum rate of 40%.
Generation-skipping gifts in excess of the exemption amount are taxed at
an additional maximum rate of 40%. For future years, the 2017 law
provides for continuing annual inflation increases in the exemption
amounts through 2025. On January 1, 2026, in the absence of future
legislation, the exemption amounts are scheduled to revert to the 2017
levels ($5.49 million + inflation adjustment).
One concern surrounding use of the current, high exemption amounts for
lifetime gifts was whether the IRS would try to “claw back” taxes on
such gifts if a lower exemption amount ended up applying at the time of
the donor’s death. Effective as of late November 2019, final
regulations issued by the Internal Revenue Service on this matter (IR-2019-189
) eliminated such concern.
Income tax basis rules remain unchanged, with inherited property receiving a reset of basis at date-of-death value.
North Carolina currently has no state inheritance, estate or gift tax.
Annual Exemption Gifts & Spousal Gifts
The federal annual gift exclusion amount for 2023 increases to $17,000
per donee (up from $16,000 in 2022). This exclusion allows an
individual donor to give an unlimited number of “annual exclusion
gifts,” so long as the amount of each gift does not exceed $17,000 per
donee during calendar year 2023. (Generally, married couples can
give $34,000 per donee as long as certain measures are taken.)
Annual exclusion gifts do not use up any of a person’s lifetime “unified
exemption amount,” and generally no gift tax return is required.
If you make a gift in excess of $17,000 to one donee, you may still
avoid paying a gift tax on the excess by filing a gift tax return (IRS
Form 709), with an election to use part of your unused unified lifetime
estate and gift tax exemption amount to cover the overage.
As in years past, a person may give an unlimited amount to his or her
spouse by using the “unlimited gift tax marital deduction,” as long as
the donee spouse is a U.S. citizen. If the donee spouse is not a
U.S. citizen, tax-free transfers to the non-citizen spouse are limited
to a “super annual exclusion” amount, which increases to $175,000 in
2023 (up from $164,000 in 2022). As with other gifts in excess of
annual exclusion amounts, the donor spouse may still avoid tax by filing
a gift tax return and electing to use his or her unused lifetime
exemption amount to cover the overage.
All annual exclusion gifts and spousal gifts must be gifts of a
“present” interest as opposed to a “future” interest, and further
qualifications can apply. It is recommended that you consult your
tax advisor prior to making a particular gift.
Other Tax-Free Lifetime Gifting
Lifetime gifts to qualified charities may generally be made in unlimited
amounts, free of gift tax. In addition, certain direct payments
made on behalf of others are not considered “gifts,” and may be made in
unlimited amounts. These include direct payments on behalf of
another person to educational institutions for tuition and to medical
providers for medical care. These payments must be made directly
to the institutions or providers, however, or they will be treated as
gifts to the individuals. Because certain qualifications apply, it
is recommended that you consult your tax advisor before making
particular charitable gifts or payments on behalf of others.
Review of Estate Planning Documents for Outdated Estate Tax Provisions
In contrast to the current federal estate and gift tax exemption amount,
as recently as 2008 the exemption amount was $2 million; in 2003 it was
$1 million, and in 2001, it was $675,000. This change has
resulted in many outdated estate plans, and much of the tax-avoidance
attention in estate planning (for estates less than the exemption
amount) has shifted away from estate tax, focusing instead on income tax
considerations ‒ including efforts to maximize stepped-up basis of
appreciated assets and avoidance of capital gains for heirs. It
may be important to review old estate planning documents to make sure
estate tax planning contained therein does not create any unnecessary
income tax burden under current tax law ‒ or cause other unwanted,
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