The Internal Revenue Service has announced that the annual gift tax exclusion and lifetime exemption is increasing for the 2023 calendar year due to inflation. The Internal Revenue Service has announced that the annual gift tax exclusion and lifetime exemption is increasing to $12,920,000 for the 2023 calendar year due to inflation.
What are Estate and Gift Taxes?
Estate and gift taxes are often considered together because they are subject to the same rate and share the lifetime exemption amount. There is a difference, however, in that the estate tax applies to transfers of the decedent’s property at death whereas gift tax applies to transfers made during an individual’s lifetime. The lifetime exemption from paying federal gift taxes is a dollar amount that you can give away over the course of your lifetime without paying the tax.
What is the Annual Gift Tax Exclusion?
The annual gift tax exclusion is set by the IRS each year and allows a taxpayer to give a certain amount per recipient tax-free without impacting the taxpayer’s lifetime gift and estate tax exemption. The annual gift tax exclusion for tax year 2023 will be $17,000 per recipient. For married couples, this means that they can give $34,000 per year per recipient beginning in 2023.
What is the Lifetime Exemption?
The lifetime gift tax exemption is the amount that an individual may gift to others over the course of their lifetime without incurring federal gift tax. The estate and gift tax lifetime exemption will be $12.92 million per individual for 2023 gifts and estates, which is up from $12.06 million in 2022. This increase means that a married couple can shield a total of $25.84 million without having to pay any federal estate or gift tax. For those couples who have already maxed out lifetime gifts, this means that they can now give away an additional $1.72 million in 2023. For those who have fully utilized their lifetime exemptions, there may be other sophisticated wealth transfer strategies that do not utilize the lifetime gifting exemptions that may be considered.
The only major exception is if you are gifting money to your spouse; most gifts between spouses are tax-free. You are allowed to gift as many assets to your spouse as you would like both during your lifetime or at the point of your death if your spouse is a U.S. citizen. However, there is a cap on the amount of money you are allowed to gift a non-citizen spouse. For 2023, the cap is $175,000, up from $164,000 in 2022. Similar to the annual exclusion for everyone else, you can give your non-citizen spouse this much per year without incurring a gift tax.
You may also claim a gift exemption if you make payments on behalf of friends or family for medical or educational purposes. Payment must be made directly to the medical care provider(s) and tuition expenses must be paid directly to the educational institution(s).
What happens if you gift more than your lifetime exemption?
As is the case for your federal income tax, the gift tax is based on marginal tax brackets. Tax rates range between 18% and 40%.
Gift & Lifetime Exemption Limits
Let’s say that in 2023 you gift $300,000 to one family member. This gift is $283,000 over the annual gift exclusion, meaning that you will need to report this gift to the IRS. However, you will not have to pay tax on that gift immediately due to the lifetime exemption limits.
The Bottom Line
The IRS allows every taxpayer to gift up to $17,000 per individual recipient in 2023. There is no limit to the number of recipients to whom you may gift this amount. The lifetime exemption for 2023 is $12.92 million. Even if you gift someone more than $17,000 in one year, you will not have to pay gift taxes unless you exceed the lifetime gift tax limit.
You will still need to report gifts over the annual exclusion to the IRS. The IRS will lower your remaining lifetime exclusion over time to determine how much of your estate will be taxed at your death.
Talk to Us
The Realize team can review your gift tax options, assess your lifetime exemption, and prepare your gift tax filings if required. Please reach out to your team of dedicated tax advisors at Realize to discuss any questions regarding gifts, the lifetime exemption, and/or gift tax filings.