Planning for 2023: IRS Estate & Gift Tax Amounts

Every year the IRS adjusts the amounts exempt from federal estate and gift taxes. The numbers have been released for 2023.  

Gift and Estate Tax Exemption: This unified credit is the amount you can either give during your lifetime, or at your death, and be exempt from federal estate and gift taxes.  The 2023 amount is $12,920,000, up from the 2022 amount of $12,060,000.  At historical high figures in the estate planning world, this means a married couple could gift more than $25 million in assets gift and estate tax free.  However, the current law is set to sunset and as of January 1, 2026, the exemption will revert back to the prior exemption amount of $5 million, adjusted for inflation, or approximately $7,000,000.

For surviving spouses who are both U.S. citizens, the qualified marital deduction for gift and estate taxes remains unlimited. Meaning U.S. citizens may transfer unlimited amounts to each other without incurring any gift tax at the first spouses death.  The excess of the couple’s combined estate tax exemption will be taxed at the death of the surviving spouse, only deferring the tax the IRS will ultimately collect.  For non-citizen spouses, the marital deduction is limited to $175,000 for 2023 and requires special planning considerations and drafting.

Annual Exclusion Amount: In addition to the lifetime exemption, there is also an annual gift tax exclusion. The annual exemption increases from $16,000 in 2022 to $17,000 in 2023 for each person you make a gift to.  This is an amount you can give to each recipient tax-free without using up any of your lifetime gift and estate tax exemption.  For married couples this means that they can give up to $32,000 in 2022 and $34,000 beginning next year.  

If one gifts an amount that is above the annual gift tax exclusion, the donor will use up a portion of their lifetime gift tax exemption ($12.92 million in 2023). The gift and estate tax exemption are linked, meaning that the use of one’s lifetime gift tax exemption will reduce the amount one may leave at death estate-tax-free. If you make gifts in excess of the annual gift tax exclusion amount, you must file a gift tax return (Form 709), due April 15 of the year after the gift was made, to report the gift and track the amount of the lifetime exemption used thus far.

If you have not already made gifts that use some or all of your 2022 annual or lifetime exemption, now may be a good time to consider doing so.  Due to market declines and volatilities, we are currently seeing clients who are leveraging the increased exemption by gifting investments at a discount to be held by or for next generation beneficiaries.  

We are operating at history highs in the estate and gift tax sector and this is a golden age of planning opportunities.  The exemption amounts are set to be cut in half in 2026. If you decide to not gift or do not utilize the current exemption amount, by December 31, 2025, then you will be limited to the lower exemption (likely set around $7 million in 2026), in effect losing the nearly $6 million difference of sheltered gifting