The gift tax annual exclusion allows an individual to gift a certain amount to any number of recipients each year without using any of the individual’s lifetime gift and estate tax exemption amount. In 2022, the annual exclusion amount was $16,000, or $32,000 for a married couple choosing to split gifts or gifting community property. For 2023, the annual exclusion amount will increase to $17,000, or $34,000 for a married couple. For example, a married couple with three children will be able to gift $102,000 ($34,000 to each child) in 2023 without using any of their estate and gift tax exemption amounts.
For gifts over the annual exclusion amount, each individual receives a lifetime transfer tax exemption. This transfer tax exemption is unified for both federal gift and estate taxes. It is the maximum a person can make in taxable gifts during his or her lifetime and the amount that can pass free of estate taxes at death combined. In 2022, this amount was $12,060,000 for each individual, or $24,120,000 for a married couple. Due to inflation, on January 1, 2023, the unified exemption amount is going to increase to $12,920,000, or $25,840,000 for a married couple. This means that even if an individual has fully utilized his or her gift tax exemption, he or she will be able to transfer an additional $860,000 free of estate or gift tax liability beginning next year.
It is important to note that the current exemption amounts were put in place by the Tax Cuts and Jobs Act of 2017 and are currently scheduled to sunset at the end of 2025. If no legislative action is taken, the exemption amount will be reduced to $5,000,000 per individual, or $10,000,000 for a married couple, indexed for inflation. Currently, if no tax law changes are made before January 1, 2026, we estimate that the unified exemption amount will be approximately $6,800,000 per individual, or $13,600,000 for a married couple.
Please note that the rules described above generally are not the same for individuals who are neither citizens nor residents of the United States.
Spouses who are both U.S. citizens may transfer unlimited amounts to each other without incurring any gift tax, as any assets in excess of the couple’s combined estate tax exemption ($24.12 million in 2022) will be taxed at the death of the surviving spouse, and transferring assets to the survivor only defers the tax that the IRS will eventually collect.
Gifts to a non-U.S. citizen spouse, however, are limited. Since a non-U.S. citizen spouse may not be subject to the U.S. estate tax, one cannot transfer unlimited assets to a non-U.S. citizen spouse since that transferred wealth might avoid U.S. estate taxation upon the non-U.S. citizen spouse’s death. Thus, when the recipient spouse is not a U.S. citizen, and regardless of whether the non-U.S. citizen spouse is a resident or nonresident of the United States, the amount of tax-free gifts is limited to an annual exclusion amount OF $100,000 adjusted for inflation. The IRS has not yet announced what the exclusion will be for calendar year 2023.
What this means to you
Individuals should consult with their professional advisors to assess whether additional gifts can or should be made in 2023 through 2025 for tax planning purposes.
Contact us
If you have any questions or would like to discuss gift and estate tax planning opportunities, please contact Jane Peebles, Cynthia Brittain, or Celine Wyman.
