High Inflation Brings About Most Significant Tax Code Increases in Nearly 40 Years
Higher inflation has, no doubt, negatively impacted the broader economy in many ways, including capital markets stress, supply chain challenges and higher prices for just about everything. The increase in tax free exemption amounts for the Federal Estate and Gift Tax (i.e., “transfer taxes”) due to annual inflation adjustments are, however, a welcome silver lining for those who act.
Specifically, inflation-adjusted amounts for tax-free transfers in 2023 under U.S. transfer tax law increase by a historic 7.1% from 2022. And that’s very good news for individuals and families with sizable estates.
The IRS has announced the following inflation adjustments affecting the Federal Estate and Gift Tax for 2023:
- Increase in Gift Tax Annual Exclusion.
The maximum amount that any one person can gift to any other person per year, without having to file a Federal Gift Tax Return or utilize any of that individual’s Lifetime Exemption (discussed below) increases from $16,000 to $17,000 in 2023.
- Considerable Increase in Lifetime Exemption Amount.
In addition to Annual Exclusion gifts, the maximum cumulative amount any one person can gift during his/her lifetime and otherwise leave to their heirs in their Federal taxable estate at death, increases from $12,060,000 to $12,920,000 in 2023– that’s an increase of $860,000 per person! This means a married couple can make cumulative tax-free gifts and/or leave a tax-free inheritance up to an aggregate of $25,840,000 in assets without paying Federal Estate Tax.
However, Time Is of the Essence.
Under current law, the Lifetime Exemption Amount will decrease from $12,920,000 per person in 2023 to $6,460,000 per person (subject to inflation adjustments in 2024-25) on January 1, 2026, or possibly sooner if Congress and the President act to accelerate the reduction.
Given that (1) 2023 inflation adjustments allow married couples to shift an additional $1.72 million to their heirs free of federal estate and gift taxes and (2) this once-in-a-lifetime opportunity will vanish no later than January 1, 2026, all high net wealth individuals should revisit their estate plans and reconsider lifetime gifting strategies with trusted advisors to take advantage of the current increased exclusion. (Note that all transfers to spouses and charities are fully deductible for transfer tax purposes, so the foregoing observations apply to all other gifts and inheritances.)
To learn more about estate and gift tax, or to seize the historic opportunity presented by these 2023 inflation adjustments, please contact Steve Byrd at (919) 787-8880 or firstname.lastname@example.org.
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