October 19, 2022
IRS increases estate tax basic exclusion, annual gift tax exclusion for 2023, along with other exemptions and deductions
The IRS has increased (Revenue Procedure 2022-38) the estate tax basic exclusion and gift tax annual exclusion, as well as the income tax marginal brackets, standard deduction and Alternative Minimum Tax (AMT) exemption, for 2023. These changes generally apply for tax returns filed in 2024.
Increases for 2023
The basic exclusion for determining the amount of the unified credit against estate tax under IRC Section 2010 will be $12,920,000 for decedents who die in 2023, an $860,000 increase from 2022.
The annual gift tax exclusion increases to $17,000 for 2023, up $1,000. Also for calendar year 2023, the first $175,000 of gifts to a spouse who is not a US citizen (other than gifts of future interests in property) will not be included in the annual total of taxable gifts under IRC Sections 2503 and 2523(i)(2).
The marginal income tax brackets have increased by approximately 7% for each type of taxpayer. The standard deduction for couples filing jointly will be $27,700, up $1,800; for single taxpayers, the 2023 standard deduction is $13,850, up $900; and heads of household may claim a $20,800 standard deduction, $1,400 more than for 2022. The AMT exemption for 2023 is $81,300 and begins phasing out at $578,150 ($126,500 for married couples filing jointly, phasing out beginning at $1,156,300). For 2022, the AMT exemption was $75,900, phasing out beginning at $539,900 ($118,100 for married couples filing jointly, phasing out beginning at $1,079,800). The foreign earned income exclusion for 2023 is $120,000, up $8,000 from 2022.
The annual adjusted rates are based on the annual Changed Consumer Price Index for All Urban Consumers (C-CPI-U) as of August 31. Before enactment of the Tax Cuts and Jobs Act of 2017, these adjustments were based on the Consumer Price Index (CPI). Generally, the C-CPI-U lags the CPI because it considers the substitutions that consumers make in response to changes in relative prices. While the annual CPI as of August 31 was 8.3%, the C-CPI-U was 8%. An increase of this size in the annual adjusted rates has not been seen in almost 40 years.
The increase in the gift tax annual exclusion and the basic exclusion will allow taxpayers to give more of their estates away without incurring gift tax, thereby ultimately reducing any estate tax that may be due upon their deaths. For planning purposes, the increase in the basic exclusion over last year amounts to $860,000 and allows for additional leveraging of estate planning strategies to minimize a taxpayer's estate. This must be balanced against the sharp increase in interest rates, which has reduced the effectiveness of these estate planning strategies.
The increase in the income tax marginal brackets, standard deduction and AMT exemption will mean more money in taxpayers' paychecks, but they will still need to wait until 2023 for that extra money while inflation has yet to peak. It is likely this will not help those who pay estimated income tax if they use the safe harbor equal to 110% of last year's income to determine their estimated payments.