The Internal Revenue Service has announced that the federal estate and gift tax exemption will be $12.92 million per individual for 2023 gifts and deaths, up from $12.06 million in 2022. The NYS estate tax exemption which is currently $6.11 million per person will also increase slightly in 2023 due to inflation, however, that increase has yet to be announced.
In addition, the annual gift tax exclusion is increasing next year due to inflation. The exclusion will be $17,000 per recipient for 2023 which is the highest exclusion amount ever. Further, the annual amount that one may give to a spouse who is not a U.S. citizen will increase to $175,000 in 2023. If a person gifts an amount that is above the annual gift tax exclusion, that individual will use a portion of his or her lifetime gift tax exemption ($12.92 million in 2023). 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, one must file a gift tax return, due April 15 in the following year, to report the gift and track the amount of the lifetime exemption that has been used.
Each year, the IRS sets the annual gift tax exclusion, which allows a taxpayer to give a certain amount (in 2023, $17,000) per year per donee tax-free without using up any of the taxpayer’s lifetime gift and estate tax exemption (in 2023, $12.92 million). For married couples, this means that they can give $34,000/year per recipient beginning next year. As an example, if a married couple has two children and four grandchildren, they may transfer $204,000 in 2023 to their descendants without reducing their combined $25.84 million gift tax exemption, thus allowing them to transfer further substantial assets gift-tax-free. Not only are the assets removed from the taxpayers’ taxable estates, the assets’ future appreciation also avoids gift and estate taxes.
Generally, spouses who are both U.S. citizens may transfer unlimited amounts to each other without incurring any gift tax, as any assets in excess of the couple’s combined estate tax exemption ($25.84 million in 2023) will be taxed at the death of the surviving spouse and transferring assets to the survivor only defers the tax that the IRS will eventually collect. Gifts to a non-US citizen spouse, however, are limited. Since a non-U.S. citizen spouse may not be subject to the U.S. estate tax, one cannot transfer unlimited assets to a non-U.S. citizen spouse since that transferred wealth could potentially avoid U.S. estate taxation upon the non-U.S. citizen spouse’s death. Thus, when the recipient spouse is not a U.S. citizen, and regardless of whether the non-U.S. citizen spouse is a resident or nonresident of the United States, the amount of tax-free gifts is limited to an annual exclusion amount. For calendar year 2023, the first $175,000 of gifts to a spouse who is a non-U.S. citizen are not included in the total amount of taxable gifts.
Although the federal lifetime estate and gift tax exemption will increase to $12.92 million in 2023, that amount is set to be cut in half at the start of 2026 when the current tax law “sunsets” or expires.
For an unmarried person who has already maxed out lifetime gifts, the increase in the federal exemption for 2023, means that he or she may give away another $860,000 in 2023. For a married couple who has already maxed out lifetime gifts, this means that they may give away another $1.72 million in 2023 The attorneys at Kurre Schneps LLP are available to discuss the effect of these changes on your situation and how they may be used to your advantage to minimize taxes.