2023 Updates to Gift Tax and Other Estate Limitations

Our tax system has two critical components that impact the transfer of wealth from one generation to the next: gift tax and estate tax. 

The gift tax applies to the transfer of property from one individual to another during their lifetime, while the estate tax is levied on the transfer of property at death. 

The IRS adjusts the federal estate and gift tax exemption amounts for inflation each year and has announced the exemption amounts for 2023. Let’s take a closer look. 

What Are Gift and Estate Tax Exemptions and Why Are They Important?

Gift and estate tax exemptions are the amounts that individuals can give away during their lifetime or pass on to their heirs at death without incurring any federal taxes. The federal government imposes these taxes on the transfer of property or money.

Understanding these exemptions is crucial for tax planning and managing one's assets to minimize tax liabilities. Knowing the exemption amounts and how they work can help individuals make informed decisions about their wealth transfer strategies.

The Federal Gift and Estate Tax Exemption

The federal gift and estate tax exemption has increased from $12,060,000 to $12,920,000. This means that married couples can gift up to more than $25 million in assets without incurring federal estate and gift taxes. However, this exemption is set to expire in 2026 and will revert back to the prior exemption amount of $5 million.

For surviving spouses, the unlimited marital deduction for gift and estate taxes remains, except for those who are not U.S. citizens. Non-citizen spouses have a marital deduction of $175,000 for 2023.

Annual Exemption

The annual gift tax exemption, in addition to the lifetime exemption, will increase from $16,000 to $17,000 in 2023 for each person you gift to in 2023.

If you have not yet utilized your 2022 annual or lifetime exemption, now is a good opportunity to do so. Many investment assets have experienced a decline in value of 25%-35% since the beginning of the year, but are expected to recover in the medium to long term. Gifting investments now to your beneficiaries will allow you to do so at a discounted rate.

When the exemption reverts in 2026, it will be crucial to understand how it will be applied. If you gift an amount less than the current exemption amount of $12,920,000 by 2025, you will be limited to the lower exemption amount, which is currently set at $7 million for gifts made after 2025. 

Planning Opportunities

Clients can make lifetime gifts outright to an individual or in a trust to take advantage of the increased exemption amounts. It is crucial to consider making gifts to reduce estate tax before the exemptions decrease at the end of 2025. For those who have already used their gift and estate tax exemption in prior years, the increase from 2022 to 2023 provides an opportunity to avoid or reduce estate tax by making additional lifetime gifts.

Americans increasingly favor a wealth tax on the ultra-wealthy, but despite an uptick in proposals, these policies have struggled to gain traction.

You never know what may happen in the future, so it’s important to consider taking advantage of the current higher exemption amounts while they are still available. There are various planning strategies that can be implemented to make the most of these higher exemption amounts before they potentially revert to lower amounts in the future.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein.  All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice.  We recommend that you seek the advice of a qualified attorney and accountant.