In 2022, inflation took its toll on the American economy, generally, and the stock market, in particular. However, the increased cost of living has also increased various estate and gift tax measures. The exclusion will be $17,000 per recipient for 2023—the highest exclusion amount ever. Further, the annual amount that one may give to a spouse who is not a U.S. citizen will increase to $175,000 in 2023.
In addition, the estate and gift tax exemption will be $12.92 million per individual for 2023 gifts and deaths, up from $12.06 million in 2022. This increase means that a married couple can shield a total of $25.84 million without having to pay any federal estate or gift tax. For a couple who has already maxed out lifetime gifts, this means that they may now give away another $1.72 million in 2023.
Annual Gift Tax Exclusion
Each year, the IRS sets the annual gift tax exclusion, which allows a taxpayer to give a certain amount (in 2023, $17,000) per recipient tax-free without using up any of the taxpayer's lifetime gift and estate tax exemption (in 2023, $12.92 million). This means that married couples can give $34,000/year per recipient beginning next year. For example, suppose a married couple has three children and five grandchildren. In that case, they may transfer $272,000 in 2023 to their descendants without touching their combined $25.84 million gift tax exemption, thus allowing them to transfer further substantial assets gift-tax-free. Not only are the assets removed from the taxpayers' taxable estates, but the assets' future appreciation also avoids gift and estate taxes.
Gifts To Non-U.S. Citizen Spouse
Generally, 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 ($25.84 million in 2023) 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 could potentially 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. For calendar year 2023, the first $175,000 of gifts to a spouse who is a non-US citizen are not included in the total amount of taxable gifts.
Lifetime Estate and Gift Tax Exemption
If one gifts an amount above the annual gift tax exclusion, that individual will use a portion of their lifetime gift tax exemption ($12.92 million in 2023). The gift and estate tax exemption are linked, meaning that the use of one's gift tax exemption will reduce the amount one may leave at death estate-tax-free. If one makes gifts in excess of the annual gift tax exclusion, one must file a gift tax return, due April 15 in the following year, to report the gift and track the amount of the lifetime exemption that has been used.
It should be noted that although the IRS has announced that the lifetime estate and gift tax exemption will increase to $12.92 million in 2023, that amount is set to be cut in half at the start of 2026.