As people begin to age, having worked hard their entire lives and accumulated significant wealth in savings and investments, it becomes very important for many to evaluate strategies for leaving their wealth to loved ones. Luckily, there are a few options that allow you to give significant sums of wealth to anybody you want up to a point without the tax burden coming into play.
What is the estate and gift tax exemption and how does it work?
There are two exemptions that can be utilized when you start discussing the estate and gift tax: the annual gift exclusion and the lifetime exclusion. The annual gift exclusion allows you to give away up to a specified amount to as many people as you choose without having those gifts counting against your lifetime exclusion. The lifetime exclusion is the total amount you can give away over your entire life to any number of people free from gift taxes.
- Annual Gift Exemption – $17,000 (2023)
- Lifetime Gift Exemption – $12,920,000 (2023)
$12,060,000 (2022) [i]
Can we utilize these exemptions while we are alive?
Yes, you can use both exemptions while you are alive, and if you have considerable wealth, it may benefit you to start giving some of it away to loved ones in your lifetime. Both you and your spouse can give up to $16,000 in 2022. This amount will increase to $17,000 in 2023 and can be given to as many people as you want. So, for example, you both can give a child $16,000 this year, totaling to $32,000. Then if you wish, you can give $16,000 each to another child, a grandchild, or a close family friend. If you go over the $16,000 ceiling, you will still not be taxed, as the overage will go toward your lifetime exemption, which is currently $12,060,000 in 2022, increasing to $12,920,000 in 2023. So, only if you go over the annual gift limit will it start counting against your lifetime exclusion amount. [ii]
The annual gift exemption amount has been steadily increasing yearly without any significant leaps and bounds. On the other hand, the lifetime gift exemption doubled after 2018, rising from a 5.6 million to $11.7 million.
Why did the estate and gift tax lifetime exemption increase so much?
This occurred because of The Tax Cuts and Jobs Act of 2017 (TCJA), established an opportunity for people to transfer wealth tax-efficiently to the next generation and beyond. Since then, it has increased annually, with 2023 set to be a whopping $12.92 million. [iii]
What does it mean that the lifetime exemption is going to sunset?
The increase in the lifetime gift exemption was not permanent legislation. It was temporary from 2018-2025. On January 1, 2026, unless Congress modifies the legislation, the exemption amount may very well return to what it was back at the end of 2017, which, adjusted for inflation, could be around $6 million. This is a substantial difference and something that people of certain means might want to take into account.
How should we approach this upcoming change?
To learn more about how the estate and gift tax exclusion sunset might affect you and your loved ones, consider consulting with a financial professional who may be able to help guide you in a direction that could work toward your financial goals.
Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
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[i] Estate Tax | Internal Revenue Service (irs.gov)
[ii] What's New - Estate and Gift Tax | Internal Revenue Service (irs.gov)
[iii] Publication 5307 (Rev. 6-2020) (irs.gov) Tracking # 1-05346443