Inflation is generally bad news. But a favorable side effect is more considerable annual inflation adjustments to federal tax breaks. Many federal tax parameters for the 2023 tax year are up about 7% over the amounts for 2022. Here are the details — plus inflation-adjusted estimates for the 2024 tax year to tide you over until the actual numbers are published in October.
Annual Federal Gift Tax Exclusion The annual federal gift tax exclusion for 2023 is $17,000 per gift recipient (up from $16,000 for 2022). Gifts up to the exclusion amount keep your unified federal gift and estate tax exemption the same. The exclusion amount is the maximum you can give away during 2023 to a single gift recipient without any federal gift or estate tax impact. The annual federal gift exclusion is increased for inflation only in $1,000 increments, so some years, it stays the same. If the inflation factor is used for federal tax parameters, the Chained Consumer Price Index for All Urban Consumers is 4% for 2024; the exclusion will remain at $17,000 for 2024.
Unified Federal Gift and Estate Tax Exemption For individuals who make gifts in 2023 or die in 2023, the unified exemption is $12.92 million (up from $12.06 million for 2022). That’s an increase of $860,000 over 2022. Thanks to the portable exemption privilege, the 2023 unified exemption for a married couple is effectively doubled to $25.84 million ($12.92 million times two). That’s an increase of $1.72 million over 2022. These increases are good news for high-net-worth individuals — especially those who previously made “taxable gifts” that exceeded the annual federal gift tax exclusion. These individuals can now make significant additional gifts or leave significantly larger estates without incurring additional federal gifts or estate tax. The unified federal gift and estate tax exemption is increased for inflation in $10,000 increments. If the inflation factor used for federal tax parameters is 4% for 2024, the exemption will approach $13.44 million for 2024 or $26.88 million for a married couple.
Generation-Skipping Transfer Tax Federal generation-skipping transfer tax (GSTT) can potentially hit wealth transfers to individuals who are more than one generation below you, for example, your grandchildren. The annual exclusion for generation-skipping gifts is the same as for the regular annual gift tax exclusion. So, the exclusion is $17,000 for 2023—up from $16,000 for 2022. The GSTT exemption for lifetime gifts and bequests is the same as the regular unified exemption. So, the GSTT exemption is $12.92 million for 2023 ($25.84 million for a married couple). For 2022, the exemption was $12.06 million or $24.12 million for a married couple.
Lessons Learned Significant inflation adjustments to the federal gift and estate tax parameters are good news for high-net-worth individuals. If you fall into that category, you have expanded opportunities to transfer wealth without negative federal gift or estate tax consequences. This is a limited-time opportunity: The current unified federal gift and estate tax exemption is scheduled to revert to the 2017 level after December 31, 2025 (adjusted for inflation from 2018 through 2025) unless Congress extends the more generous exemption. Contact Eric Miller, Trust and Estate Planning tax advisor, to ensure you take full advantage of today’s favorable gift and estate tax rules.
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