Tax planning should be part of any comprehensive estate plan. To ensure that you minimize your estate’s exposure to federal (and in some cases, state) estate taxes, you need to know what the current tax laws are and how they might impact your estate. Toward that end, a Murfreesboro estate planning attorney at Bennett | Michael | Hornsby provides information on estate tax updates and changes for 2023.
Federal Gift and Estate Taxes
You will leave behind an estate when you die that is made up of tangible and intangible assets. The combined value of your estate assets and the value of any qualifying gifts you made during your lifetime are subject to federal gift and estate taxes. The current estate tax rate is 40 percent which will not change for 2023.
The Lifetime Exemption
With a 40 percent tax rate, the good news is that each taxpayer is entitled to take advantage of the lifetime exemption which applies before any tax obligation is calculated. The American Taxpayer Relief Act of 2012 (ATRA) set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, tax legislation was signed into law that increased the lifetime exemption amount for 2018 and for several years thereafter.
For 2023, the individual lifetime exemption amount is set to increase from its current $12.06 million to $12.92 million, effectively shielding an additional $344,000 in assets from federal gift and estate taxes. A married couple, therefore, could pass down a total of $25.84 million without incurring federal gift and estate taxes.
Unless extended by Congress, the exemption amounts are scheduled to “sunset” (revert) to the previous $5 million exemption amount, adjusted for inflation, on January 1, 2026. The Internal Revenue Service (IRS) has clarified that estates that made gifts during the increased exemption period (2018-2025) can use the higher exclusion levels if the date of death occurs after the sunset provision drops the exemption back to the 2012 limit.
Annual Gift Tax Exclusion
The lifetime exemption applies to the cumulative value of all gifts made during your lifetime and at the time of your death. Another equally important tax avoidance tool is the annual gift tax exclusion. As the name implies, the annual exclusion looks at the value of gifts made in a single year. The annual exclusion allows every taxpayer to make tax-free gifts to an unlimited number of beneficiaries each year. Best of all, the value of gifts made using the annual exclusion does not count against your lifetime exemption limit. For 2023, the annual gift tax exclusion limit will increase from $16,000 to $17,000 for individuals. Married couples may use the gift-splitting option to combine their exclusions and gift assets valued at up to $34,000 to an unlimited number of beneficiaries.
By way of illustration, imagine that you are married with two adult children, four grandchildren, and two charities that you donate to on a regular basis. You and your spouse could gift each child, grandchild, and charity up to $34,000 worth of assets each year without those gifts counting toward your lifetime exemption. Between you and your spouse, you could gift $272,000 in assets each year without incurring a federal gift and estate tax obligation. In 20 years, you could pass down or gift over $5 million tax-free.
The Unlimited Marital Deduction and Your Non-Citizen Spouse
If both spouses in a married couple are United States citizens, one spouse may make unlimited gifts to the other spouse, during life or at the time of death, using the unlimited marital deduction unless the spouse is not a U.S. citizen. The justification for the exception to the unlimited marital deduction is that allowing a tax-free transfer to a U.S. citizen only delays the payment of gift and estate taxes until the death of the surviving spouse whereas allowing the same tax-free gift to a non-citizen spouse might allow the surviving spouse to avoid paying taxes altogether. Therefore, gifts to a non-citizen spouse are taxable if the value of those gifts exceeds the current limit. For 2023, the first $175,000 of gifts to a non-citizen spouse are not included in the total amount, representing an $11,000 increase from the 2022 limit.
Contact a Murfreesboro Estate Planning Attorney
If you have additional gift and estate tax questions, consult with a Murfreesboro estate planning attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.