Bloomberg Tax and Wolters Kluwer are companies that provide tax preparation software among other things. When you are in that business, you have to keep a finger on the pulse of ever-changing tax codes and tables. This is their area of expertise, and they have recently announced their projections for the gift and estate tax exclusions in 2023.
We are going to pass along that information in this post. However, before we get to it, we will take a look at these taxes from an overview to provide the proper context.
Unified Gift and Estate Tax
The federal gift tax can be applied on the portion of an estate that exceeds the exclusion or credit. This is a particular dollar amount that is established via legislative mandate. In 2022, the federal estate tax exclusion is $12.06 million. The top rate of the tax is 40 percent, so it can consume a significant portion of your legacy.
There is an unlimited marital estate tax deduction. It can be used to transfer any amount of property to your spouse free of taxation if you are married to an American citizen. Plus, the exclusion is portable between spouses. This means that a surviving spouse can use their deceased spouse’s exclusion.
The logical response to this tax is lifetime gift giving. This was possible back in 1916 when the tax was originally established. In 1924, a gift tax was enacted to close the loophole. It was repealed two years later, but it was reenacted in 1932.
We have had a gift tax since then, and the two taxes are now unified under the tax code. As a result, the exclusion is a unified exclusion. It applies to your estate and sizable gifts that you give while you are living.
Annual Gift Tax Exclusion
In addition to the unified lifetime gift and estate tax exclusion, there is an annual gift tax exclusion. You can use it to give $16,000 to an unlimited number of people each year free of taxation. To be clear, you would not be using any of your unified exclusion to give a gift tax-free unless it exceeds $16,000 in value.
Projected 2023 Gift and Estate Tax Exclusions
Now that we have provided the necessary background information, we can get to the point of this post. After they evaluated all of the relevant economic data, Bloomberg Tax and Wolters Kluwer have determined that the annual gift tax exclusion next year will go up to $17,000. They expect the unified gift and estate tax exclusion to go from $12.06 million to $12.92 million.
Upcoming Expiration of the Tax Cuts and Jobs Act
The exclusion that we have right now is the highest it has ever been. It was implemented via a provision in the Tax Cuts and Jobs Act that was enacted in 2017. During that year, the exclusion was $5.49 million, and it had been $5 million indexed for inflation since 2011.
This provision is going to sunset on January 1, 2026. At that time, it will go back down to the 2017 level indexed for inflation. As a result, you have an open window of opportunity for a few more years. You could transfer assets to your loved ones and/or fund tax efficiency trusts while the exclusion is at this level.
State-Level Estate Taxes
There are 12 states in the union that have state level estate taxes. California is not one of them, but there is another consideration. If you own property in a state with an estate tax, it would apply to your estate. There are exclusions in each state, but they are lower than the federal exclusion.
For example, our neighbors in Oregon have an estate tax with a $1 million exclusion. There is also an estate tax in Hawaii with a $5.49 million exclusion.
We Are Here to Help!
Whether your estate is exposed to taxation or not, legal counsel is invaluable when you are devising your plan. If you are ready to get started, you can call us at 818-937-2355 to schedule an appointment at our Burbank, CA estate planning office. You can alternately fill out our contact form if you would prefer to send us a message.
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