In October 2022, the Internal Revenue Service (IRS) announced tax changes for 2023 — changes primarily driven, in part, by the current inflationary environment. For affluent couples or individuals interested in transferring assets to their heirs, this announcement may create new opportunities.
This article provides a high-level overview of the tax changes. It’s not intended to be a replacement for real-life advice. Please consult your tax, legal, and accounting professionals before modifying your estate strategy as a result of the updated tax rules.
The lifetime estate and gift tax exemption is rising in the new year. Here's what that may mean for updating an estate strategy in 2023.
What Is the Lifetime Estate and Gift Tax Exemption?
The lifetime estate and gift tax exemption refers to the limit in assets that the federal government allows an individual to give away over the course of their life before having to pay taxes.
The IRS recently announced that the inflation-adjusted limit for 2023 is $12,920,000, up $860,000 from 2022’s limit of $12,060,000.1
If you’re married, it’s possible to transfer the estate tax exemption to your spouse upon your passing. This would effectively double your surviving spouse’s exemption limit from $12.92 million to $25.84 million.
The federal estate tax and lifetime gift tax exemption are directly related, as the lifetime gift tax exemption is the same amount as the $12.92 million federal estate tax exemption limit.
For example, If you gifted your granddaughter $30,000 this year, here’s how that would impact your estate taxes:
The 2023 annual gifting tax exemption limit was raised to $17,000. That means the first $17,000 of that $30,000 is tax-exempt. The remaining $13,000 then counts against both the federal estate tax and lifetime gift tax exemptions. Upon your passing, your estate tax exemption would be $12,907,000 since the $13,000 has been deducted (assuming this is the only gift given).
It’s important to remember that the updated estate tax rules were part of the Tax cuts and Jobs Act (TCJA), which was passed in 2017. Like several TCJA provisions, the higher estate tax limit is due to sunset in 2025. Barring congressional action, the exemption amount is scheduled to return to about $6.2 million, adjusted for inflation. Any updates or revisions to an estate strategy should take into consideration current law as well as any changes that may happen post-2025.
Tax Exempt Gifts
There are certain gifts you can make in your lifetime that may be exempt from gift or estate taxes. This includes:1
- Gifts to eligible charities or non-profit organizations
- Gifts to your spouse
- Gifts to political organizations
- School tuition (paid directly to the school)
- Medical expenses (paid directly to the healthcare facility or provider)
Gifts that fall into these categories may not need to be reported to the IRS. And if you choose to itemize your deductions, gifts made to eligible charities or non-profits could potentially be deducted from your taxable income. Your tax professional can provide more guidance.
What’s Changing for 2023?
As mentioned earlier, the federal estate tax exemption limit is rising in 2023 to $12.92 million.1
In addition, the annual gifting tax exclusion for 2023 is $17,000 per person, up from $16,000. This gifting exclusion allows you to give up to $17,000 to as many individuals as you’d like. As long as the gift stays under the annual limit, it may not be counted toward your lifetime exemption limit.1
Who Does This Benefit?
The recent changes to the estate exemption limit benefit high-net-worth couples and families, including those who have already reached their lifetime exemption limit. Thanks to this inflation adjustment, couples can now give an extra $1.72 million to each child, grandchild, niece, nephew, or friend.
Should You Gift While Still Living?
People tend to associate the idea of an inheritance with death. But it may actually be beneficial to give a gift while you’re still living.
An inheritance can provide financial help to people sooner rather than later. While some people who are in line to inherit your estate may be in a position to wait until your passing, others may have more immediate needs. You can build the gifting strategy into your estate strategy and help people today while being fair with others who may benefit in the future.
The Emotional Side of Gifting
Gifting while you’re still alive isn’t all about the tax savings. There’s certainly an emotional and personal element to doing so.
You may have a child or grandchild who could use the money for college, a wedding, the downpayment on a house, medical bills, etc. In those cases, you may find it fulfilling to help them now rather than through an inheritance.
State Estate and Inheritance Taxes
Another notable advantage of gifting while you’re still alive is the ability to potentially bypass your state’s estate or inheritance taxes. In 2022, there are 17 states that have one or both of these taxes. They include:2
- New Jersey
- New York
- Rhode Island
- Washington, D.C.
Other 2023 Inflation-Adjusted Tax Changes
Here are a few other notable tax changes for the 2023 tax year.
Couples filing jointly will see a rise in the standard deduction from $25,900 in 2022 to $27,700 in 2023. For individual filers, it’ll be $13,850 and for head-of-household filers, the standard deduction will be $20,800.1
Ordinary Income Rates
The ordinary income rates are being adjusted to accommodate inflation for 2023:1
- 10%: $11,000 or less and $22,000 or less for married filing jointly
- 12%: Over $11,000 and over $22,000 for married filing jointly
- 22%: Over $44,725 and over $89,450 for married filing jointly
- 24%: Over $95,375 and over $190,750 for married filing jointly
- 32%: Over $182,100 and over $364,200 for married filing jointly
- 35%: Over $231,250 and over $462,500 for married filing jointly
- 37%: Over $578,125 and over $693,750 for married filing jointly
Earned Income Tax Credit
Those who have three or more children and qualify for the Earned Income Tax Credit will receive $7,430 in 2023, up from $6,935 in 2022.1
Retirement Savings Plans
Contribution limits to retirement savings plans are rising in 2023 as well. Individuals contributing to 401(k)s, 403(b)s, 457, and Thrift Savings Plans may contribute up to $22,500. Catch-up contributions are increasing to $7,500 for those 50 and older.1
IRA contribution limits are up to $6,500 for 2023, compared to $6,000 in 2022.1
Thinking Ahead to 2023
While rising inflation may have caused some disruptions this year, it brings a bit of good news to high-earners in regard to their estate strategy. The IRS’s recent changes to the 2023 tax rules may impact your current approach, or it even might create new opportunities.
We frequently work with our client's tax and estate professionals to review their unique situations and outline opportunities moving forward, so please feel free to reach out if you’d like to discuss.
The content is developed from sources believed to be providing accurate information. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state, or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. This article was written by an independent third party. It is provided for informational and educational purposes only. The views and opinions expressed herein may not be those of Guardian Life Insurance Company of America (Guardian) or any of its subsidiaries or affiliates. Guardian does not verify and does not guarantee the accuracy or completeness of the information or opinions presented herein. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.