In late October of 2022, the IRS published the inflation adjusted limits for transfer taxes for 2023. The Applicable Gift and Estate Exclusion Amount increases to $12,920,000 per individual up from $12,060,000 in 2022. For those individuals who have used their full exclusion amount, they now have an additional $860,000 to give without incurring gift tax. This exclusion is the amount that an individual may transfer during their lifetime or at their death without incurring gift and estate tax. As a reminder, the exclusion amount increased dramatically as part of the Tax Cut and Jobs Act of 2017. The exclusion was $5,490,000 in 2017 and increased to $11,180,000 in 2018 and has adjusted annually for inflation ever since. The increase is only temporary and is set to sunset back to $5,000,000 in 2026 (adjusted for inflation). The best estimates for what the adjusted exemption levels could look like in 2026 are between $6.5 million and $6.8 million per person barring any Congressional intervention.

In addition to an increase of the Gift and Estate Exclusion Amount, there was an increase to the Annual Exclusion Amount for 2023. The amount increased to $17,000 up from $16,000 in 2022. The exclusion amount is the maximum amount that an individual can gift to another individual without the need to report the gift to the IRS or without it affecting the individual’s lifetime gift exclusion amount. Married couples can gift up to $34,000 in 2023 without incurring a gift tax. There is no limit to the number of gifts an individual can make in each calendar year. The annual gift tax exclusion was first indexed for inflation as part of the Tax Relief Act of 1997, when it was $10,000, and only increases in increments of $1,000. The annual gift exclusion amount does not include payments for medical or tuition expenses for the benefit of others. The IRS allows a donor to pay medical and tuition expenses for another without it being deemed a taxable gift as long as the payments are made directly to the provider and not to the individual for whom the gift is being made.

For those with significant wealth, a gift of $17,000 may not seem like much of an estate planning tool, but the fact that a person can gift $17,000 to as many people as they like is what makes this gift exclusion so powerful. For example, an individual, Sue, is married and has two children. Both of those children are married and each of those children has two children of their own. Sue can gift $17,000 to each of those members of her family annually. Sue’s annual gifts total $136,000 ($17,000 x eight family members). If Sue is married, her spouse can give the same amount. So, Sue and her spouse can gift $272,000 each year. Over a ten year period, without another increase to the annual exclusion amount, Sue and her spouse have reduced their estate by $2,720,000 and shifted significant wealth to their family tax-free.

Both of these increases present opportunities to you for tax-free wealth transfer or continuation of a gifting strategy you already have in place. These increases should be part of your conversations with your advisors in 2023.