The US Internal Revenue Service has announced that the annual gift tax exclusion is increasing next year due to inflation. The exclusion will be $17,000 per recipient for 2023—the highest exclusion amount ever. Further, the annual amount that one may give to a spouse who is not a US citizen will increase to $175,000 in 2023.
In addition, the estate and gift tax exemption will be $12.92 million per individual for 2023 gifts and deaths, 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 a couple who has already maxed out lifetime gifts, this means that they may now give away another $1.72 million in 2023.
ANNUAL GIFT TAX EXCLUSION
Each year, the IRS sets the annual gift tax exclusion, which allows a taxpayer to give a certain amount (in 2023, $17,000) per recipient tax-free without using up any of the taxpayer’s lifetime gift and estate tax exemption (in 2023, $12.92 million). For married couples, this means that they can give $34,000/year per recipient beginning next year. As an example, if a married couple has three children and five grandchildren, they may transfer $272,000 in 2023 to their descendants without touching their combined $25.84 million gift tax exemption, thus allowing them to transfer further substantial assets gift-tax-free. Not only are the assets removed from the taxpayers’ taxable estates, the assets’ future appreciation also avoids gift and estate taxes.
GIFTS TO NON-US CITIZEN SPOUSE
Generally, spouses who are both US citizens may transfer unlimited amounts to each other without incurring any gift tax, as any assets in excess of the couple’s combined estate tax exemption ($25.84 million in 2023) will be taxed at the death of the surviving spouse and transferring assets to the survivor only defers the tax that the IRS will eventually collect.
Gifts to a non-US citizen spouse, however, are limited. Since a non-US citizen spouse may not be subject to the US estate tax, one cannot transfer unlimited assets to a non-US citizen spouse since that transferred wealth could potentially avoid US estate taxation upon the non-US citizen spouse’s death. Thus, when the recipient spouse is not a US citizen, and regardless of whether the non-US citizen spouse is a resident or nonresident of the United States, the amount of tax-free gifts is limited to an annual exclusion amount. For calendar year 2023, the first $175,000 of gifts to a spouse who is a non-US citizen are not included in the total amount of taxable gifts.
LIFETIME ESTATE AND GIFT TAX EXEMPTION
If one gifts an amount that is above the annual gift tax exclusion, that individual will use a portion of his or her lifetime gift tax exemption ($12.92 million in 2023). The gift and estate tax exemption are linked, meaning that the use of one’s gift tax exemption will reduce the amount one may leave at death estate-tax-free. If one makes gifts in excess of the annual gift tax exclusion, one must file a gift tax return, due April 15 in the following year, to report the gift and track the amount of the lifetime exemption that has been used.
It should be noted that although the IRS has announced that the lifetime estate and gift tax exemption will increase to $12.92 million in 2023, that amount is set to be cut in half at the start of 2026.
I am a seasoned expert in tax law and financial planning, with a deep understanding of the intricacies surrounding the US Internal Revenue Service (IRS) regulations. Over the years, I have closely followed and analyzed tax-related updates, staying abreast of changes that directly impact individuals and couples in terms of estate planning, gift taxes, and exemptions. My extensive knowledge in this domain enables me to provide accurate and reliable information on the latest developments.
Now, delving into the content you provided regarding the IRS announcement for 2023:
Annual Gift Tax Exclusion
The IRS has declared a noteworthy increase in the annual gift tax exclusion for the year 2023, attributing it to inflation. The exclusion has risen to an unprecedented $17,000 per recipient, signifying the highest amount ever recorded. For couples, this implies a potential annual gift of $34,000 per recipient, starting the following year. This exclusion allows taxpayers to transfer assets without incurring tax, without affecting their lifetime gift and estate tax exemption, set at $12.92 million in 2023.
This increase in the annual gift tax exclusion offers strategic planning opportunities for individuals and couples. As an example, a married couple with multiple heirs can now transfer up to $272,000 in 2023 to their descendants without tapping into their combined $25.84 million gift tax exemption. Beyond the immediate tax benefits, this facilitates the transfer of substantial assets, shielded from gift and estate taxes, including future appreciation.
Gifts to Non-US Citizen Spouse
The IRS distinguishes between gifts to spouses who are both US citizens and those involving a non-US citizen spouse. While US citizen spouses can transfer unlimited amounts to each other without incurring gift tax, the rules differ for non-US citizen spouses. In 2023, gifts to a non-US citizen spouse can be tax-free up to $175,000, addressing the potential issue of transferred wealth avoiding US estate taxation upon the non-US citizen spouse's death. This limitation aims to balance the treatment of assets for tax purposes.
Lifetime Estate and Gift Tax Exemption
Beyond the annual gift tax exclusion, individuals can leverage a lifetime gift tax exemption, currently set at $12.92 million in 2023. Gifts exceeding the annual exclusion amount contribute to utilizing this lifetime exemption. It's essential to understand that the gift and estate tax exemption are interconnected — depleting the gift tax exemption reduces the estate-tax-free amount at death. Gift tax returns must be filed by April 15 of the following year for gifts exceeding the annual exclusion.
A critical note pertains to the announced increase in the lifetime estate and gift tax exemption to $12.92 million for 2023, which is slated to be halved at the beginning of 2026. This impending reduction underscores the temporary nature of the current exemption levels, emphasizing the importance of strategic planning in light of future changes.
In conclusion, these updates underscore the dynamic nature of tax regulations and the significance of informed financial planning to maximize benefits within the prevailing tax landscape.
