The Internal Revenue Service (“IRS”) recently published Rev. Proc. 2022-38, which announced increases to the estate and gift tax exemption amounts. For 2023, the estate and gift tax exemption will be $12.92 million per individual, up from $12.06 million in 2022. This increase means that a married couple may collectively shield up to $25.84 million without paying federal estate or gift taxes. Gifts or estates in excess of the exemption amounts will be subject to a maximum tax of 40 percent. Married couples who have already utilized their full lifetime gift tax exemptions may now gift an additional $1.72 million in 2023.
In addition, the annual gift tax exclusion will increase to $17,000 per person ($34,000 per married couple) in 2023 from $16,000 ($32,000 per married couple) in 2022. As an example, if a married couple has five children and four grandchildren, the married couple may transfer $306,000 (nine beneficiaries multiplied by $34,000) in 2023 to their children and grandchildren without reducing their combined $25.84 million gift tax exemption. The gift tax exclusion allows individuals and married couples to transfer substantial assets gift-tax-free. Not only are the assets removed from the taxpayers’ taxable estates but the potential future appreciation of the assets being transferred also avoids gift and estate taxes.
Gifts in excess of the annual gift tax exclusion will reduce the donor’s lifetime gift tax exemption. If an individual completes gifts in excess of the annual gift tax exclusion, the donor must file a gift tax return, due on April 15 in the following year, to report the gift and track the amount of the lifetime exemption that has been used.
However, barring legislative action, the lifetime estate and gift tax exemption will decrease to $5 million person (indexed for inflation) on January 1, 2026. Fortunately, the IRS issued guidance stating that individuals who utilize the current lifetime gift tax exemptions will not be penalized if the exemption amount is lower at the taxpayer’s death.
The uncertainty surrounding estate and gift tax exemptions presents unique planning opportunities that may not be available in the coming years. You are encouraged to consult with tax professionals to maximize the current federal estate and gift tax exemptions. You should also be mindful of state-level estate, gift and inheritance taxes and income tax planning.
Craig Panholzer is an associate in Cooper Levenson’s Business & Tax practice group in its Florida office. He concentrates his practice on business transactions, estate planning, special needs planning, probate and tax matters.
Michael Salad is a partner in Cooper Levenson’s Business & Tax practice group. He concentrates his practice on estate and asset protection planning, special needs planning, business transactions, mergers and acquisitions and tax matters. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in Florida, New Jersey, New York, Pennsylvania, Maryland, Connecticut, Georgia, Massachusetts and the District of Columbia and regularly counsels clients who are seeking to relocate to Florida.