Client Alert: 2023 Changes to the Estate and Gift Tax Exclusion Amounts
Date: January 20, 2023
2023 Federal Estate and Gift Tax Amounts
- Federal Exemption Amount. The amount which can pass free of federal estate, gift and generation-skipping taxes (“the federal basic exclusion amount”) has increased in 2023 from $12.06 million to $12.92 million per person. Thus in 2022, unmarried individuals may exempt $12.92 million from federal estate and gift tax, and married couples may exempt $25.84 million. The estate tax exemption will remain “portable” between spouses, meaning that a surviving spouse may use his/her deceased spouse’s unused exclusion amount if elected on a timely-filed estate tax return. The exclusion amount is scheduled to decrease drastically on January 1, 2026 to $5 million per person, indexed for inflation, if not reduced before that date through tax reform legislation. Pursuant to certain IRS regulations issued since 2019, use of one’s federal estate and gift tax exemption between January 1, 2018 and December 31, 2025 will not cause a later recapturing, or “clawing back,” of the increased exemption amount used. The exemption increase and clawback protection create opportunities for clients wishing to utilize their higher exemptions during their lifetimes before the exemptions sunset. For those looking to take advantage of these opportunities, we are happy to discuss various planning techniques which may be appropriate based on each client’s personal and financial circumstances.
- Annual Exclusion for Gifts. The annual exclusion from gift tax (i.e. the amount that may be gifted annually to individuals without tax consequence) has increased from $16,000 to $17,000 per recipient for 2023. This means married couples will be able to gift up to $34,000 per year per recipient without causing a reduction of their combined federal estate and gift tax exclusion of $25.84 million.
- Build Back Better Act. Although the federal estate and gift tax exemption has been steadily increasing since 2018, absent further congressional action, the exemption is set to be cut in half at the start of 2026. Due to legislative uncertainty surrounding the exemption, if you are interested in using your higher exemption now, we encourage you to contact our office to discuss various planning techniques and options which may suit your needs.
- SECURE 2.0. In December 2022, Congress passed the Consolidated Appropriations Act of 2023 which contains a section devoted to retirement accounts titled SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement). This legislation is a sequel to the SECURE Act of 2019. One of the most notable changes in SECURE 2.0 is an increase in the age for Required Minimum Distributions (“RMDs”). The deadline for commencing RMDs is known as the Required Beginning Date (“RBD”). For those born on or after July 1, 1949, the first SECURE Act extended the RBD to April 1 of the year after the account owner turns 72 (up from the previous age of 70 ½ which is still applicable for those born before July 1, 1949). As of January 1, 2023, the age will now be increased from 72 to 73*. The age to commence RMDs will again increase to age 75 starting on January 1, 2033.
*Note: If you turned 72 in 2022, you will still need to take your first RMD by April 1, 2023.
Those who will turn 72 in 2023 will not need to take their first RMD until April 1, 2024.
Maryland Estate Tax
- The Maryland estate tax exemption remains at $5 million per person, and like the federal estate tax exemption, is portable between spouses. With respect to gift tax, Maryland has no state gift tax.
Virginia Estate Tax
- Virginia repealed its estate tax in 2007 and continues to have no state estate tax and no state gift tax.
District of Columbia Estate Tax
- DC’s estate tax exemption was reduced to $4 million per person in 2021 and was set to be adjusted annually for cost of living adjustments starting in 2022. With the adjustments, the 2023 exemption amount is expected to increase to $4,528,800 per person, up from $4,254,800 per person in 2022. Unlike the federal exemption, there is no provision for portability of the DC estate tax exemption between spouses. Like Maryland and Virginia, DC has no gift tax.
The start of the new year is an excellent time to review and update your estate plan to be certain that your personal goals continue to be achieved and to assess the impact of the new laws on your existing plan. Irrespective of taxes, there are many nontax issues which a well-designed estate plan should address, such as guardianship of minor children, planning for loved ones with special needs, family business succession and asset protection. We encourage you to contact our office at your convenience to discuss your current estate plan and ensure that it continues to meet your goals and needs.
We look forward to the opportunity to continue to serve you in the future.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.