As the end of the year creeps upon us, experts have underestimated the anticipated magnitude of inflation adjustments to the estate and gift tax exclusion amounts for 2023-24. From a tax-planning perspective, high-net-worth individuals welcome the news, particularly those who have already made significant gifts and can now make additional substantial gifts without incurring gift tax.
How do Federal Gift and Estate Taxes Work?
The federal gift and estate tax work together to potentially tax all gratuitous wealth transfers from one person to another. All gifts made during one’s lifetime are subject to gift tax laws, and one’s estate is subject to estate tax laws at death. All taxable gifts made during one’s lifetime are added to the taxable estate in determining one’s estate tax liability.
Fortunately, everyone has a “basic exclusion amount” that is exempt from the reach of the gift and estate tax, and this exclusion amount is adjusted annually for inflation. What this means is that if your total taxable gifts made during your lifetime are less than this basic exclusion amount, you will not pay any gift tax. Similarly, if the sum of your estate and all your taxable gifts are less than this basic exclusion amount, you will not pay any estate tax. This basic exclusion amount is adjusted every year for inflation.
Basic Exclusion Amounts and Inflation
Currently, in 2022, the basic exclusion amount is $12.06 million. Thus, a single individual would not pay any gift or estate tax if the sum of such individual’s taxable gifts made their during lifetime and such individual’s estate does not exceed $12.06 million. For a married couple, this number would double to $24.12 million.
The expected inflation adjustment for the basic exclusion amount for 2023 is $860,000. Thus, next year the basic exclusion amount for every person is expected to increase to $12.92 million, and future inflation adjustments could push the basic exclusion amount to $14.00 million or more by 2025.
The 2017 Tax Cuts and Jobs Act doubled the basic exclusion amount for 2016 – 2025. Thus, come 2026, the basic exclusion amount will return to what it would have been if the Tax Cuts and Jobs Act had not been enacted – probably somewhere between $7 and $8 million. While this amount likely will eliminate any potential gift and estate tax liability for more than 99.7% of the country, if you are one of the fortunate few with an estate greater than the exemption amount, don’t hesitate to contact your estate planning attorney. Our team can help you minimize your affairs and possibly eliminate gift and estate taxes.