Inflation can have negative effects, but it also has a positive side when it comes to federal tax breaks. For the 2023 tax year, many federal tax parameters have been adjusted upwards by about 7 percent compared to 2022. This article provides the details of these adjustments and also gives estimated inflation-adjusted amounts for the 2024 tax year. Please note that the official figures will be published by the IRS in October.
2023 Gift Tax Exclusion
The annual federal gift tax exclusion for 2023 has increased to $17,000 per gift recipient, up from $16,000 in 2022. It’s important to remember that gifts up to this exclusion amount do not reduce your unified federal gift and estate tax exemption. This means you can give up to $17,000 to a single gift recipient without any federal gift or estate tax impact. (Learn about the gift tax 709 form here.)
Unified Federal Gift and Estate Tax Exemption
For individuals making gifts or dying in 2023, the unified exemption amount is $12.92 million, an increase of $860,000 compared to 2022. The portable exemption privilege allows married couples to effectively double this exemption to $25.84 million in 2023, an increase of $1.72 million compared to 2022.
These increases in the unified exemption are beneficial for high-net-worth individuals, especially those who have made taxable gifts exceeding the annual federal gift tax exclusion. Such individuals can now make significant additional gifts or leave larger estates without incurring additional federal gift or estate tax.
For the 2024 tax year, assuming a 4 percent C-CPI-U factor, the unified exemption is expected to approach $13.44 million ($26.88 million for a married couple).
Generation-Skipping Transfer Tax
The generation-skipping transfer tax (GSTT) applies to transfers of wealth to individuals who are more than one generation below the grantor, such as grandchildren. The annual exclusion for generation-skipping gifts is the same as the regular annual gift tax exclusion. Therefore, for 2023, the exclusion is $17,000, up from $16,000 in 2022.
The GSTT exemption for lifetime gifts and bequests is also the same as the regular unified exemption. Hence, the GSTT exemption for 2023 is $12.92 million ($25.84 million for a married couple), an increase from $12.06 million ($24.12 million for a married couple) in 2022.
Noncitizen spouses are not eligible for the unlimited marital deduction privilege, which allows unlimited wealth transfers between citizen spouses without any federal gift or estate tax liability. However, noncitizen spouses are eligible for a larger annual federal gift tax exclusion compared to other recipients. For 2023, the exclusion for noncitizen spouses is $175,000, up from $164,000 in 2022.
A U.S. citizen can give up to $175,000 in 2023 to a noncitizen spouse without using any of their unified federal gift and estate tax exemption. If the citizen spouse passes away in 2023, amounts left to the noncitizen spouse will be included in the deceased citizen spouse’s estate. These amounts can be sheltered by the remaining federal estate tax exemption of up to $12.92 million.
For the 2024 tax year, if the inflation factor is 4 percent, the gift tax exclusion for noncitizen spouses is expected to increase to approximately $182,000.
The inflation adjustments to federal tax parameters for 2023 bring good news to high-net-worth individuals, opening up opportunities for wealth transfers without negative federal gift or estate tax consequences. To maximize these advantages, consult with your estate planning or tax advisor. It’s important to note that the current unified federal gift and estate tax exemption is set to revert to the 2017 level (adjusted for inflation) unless Congress extends the more generous exemption.
The professionals at Sol Schwartz & Associates have been assisting high-net-worth families since our founding in 1980 on issues ranging from complex trust taxation, generation skipping trusts, and forms such as Form 1041, Form 706 and Form 709. If you’d like to discuss your situation with us, just leave us your contact information below, and we will get back to you promptly.