As the lifetime gift tax exclusions and estate tax exemption sunset draws closer, planning for future annual gifting has a new sense of importance. Permanently established by the American Taxpayer Relief Act (ATRA) of 2012, estate and gift tax exemption were originally set at a lifetime limit of $5 million but they’ve been expanded and adjusted for inflation in the years since. Below we explain how the exemptions have grown over the years, as well as the implications for its possible end in 2025.
Key Takeaways:
- Lifetime estate exemption set to raise $860,000 in 2023
- Annual gift limits also seeing an increase from $16,000 in 2022 to $17,000 in 2023
- Unless it’s extended by Congress before 2026 sunset, the estate exemption will drop to 2012 ATRA levels
- IRS clarified estates that made gifts during 2018-2025 period can use the higher exclusion levels if the date of death occurs after the sunset
The Tax Cuts and Jobs Act of 2017 expanded the lifetime limits set by ATRA from $5 million per individual, and indexed for inflation, by more than double to $11,180,000. In 2022, the gift tax exclusion and estate tax exemption were indexed once more to $12,060,000 for an individual and up to $24,120,000 for a married couple.
How the Estate Tax Exemption Changes in 2023
That amount is set to rise again in 2023 to $12,920,000 for an individual and $25,840,000 for a married couple. If you’ve already reached your $12,060,000 lifetime limit for 2022, as of January 1, 2023, you would be able to give up to $860,000 more without gift tax consequences.
Details on Gift Tax Deduction Update
In addition to an expanded lifetime exclusion, the annual gift tax exclusion will rise from $16,000 per recipient in 2022 to $17,000 per recipient in 2023. Married couples will be allowed to gift-split up to $34,000 to any beneficiary to pass wealth to others in a tax-efficient manner. These $17,000 gifts can be given to as many individuals as the gift-giver pleases without having to worry about gift tax.
In a previous blog on the increased estate tax exemption and gift tax exclusions of 2022, we highlighted several exclusions, including gift limits to spouses, and what to do if you exceed the annual exclusion amount. We also detailed new proposed regulations from the IRS surrounding the anti-clawback rules regarding certain gifts includable in a decedent’s estate.
Gift and Estate Tax Exemption Sunset Approaching
TCJA will sunset at the end of 2025, unless it’s extended or otherwise changed by Congress. Otherwise, it will reset to ATRA levels of $5 million adjusted for inflation. These large gifts won’t harm estates after 2025, according to the IRS. The organization clarified regulations, allowing estates to compute their estate tax credit using the higher exclusion level as long as they made gifts during the 2018 to 2025 period.
Since this is potentially a time limited opportunity, individuals and families should work with their advisors to finalize 2022 gifting and to look forward and determine if additional gifting in 2023 would be beneficial. Contact an Anders advisor below to discuss your estate planning options or to learn more about Anders Family Wealth and Estate Planning.
