New Gift Tax Exclusions Announced  

Every few years, the IRS adjusts the annual gift tax exclusion.  The IRS recently announced that the gift tax exclusion for 2023 will be increased to $17,000.  This means that a taxpayer may gift up to $17,000 to an unlimited number of persons without having to pay gift taxes or reduce their estate tax exemption amount.  Because the gift tax exclusion is available to all individuals, married couples can gift up to $34,000 annually.

For example, Mom and Dad want to gift money to Daughter.  Mom and Dad can each gift $17,000 to Daughter for a total of $34,000.  Daughter is married and Mom and Dad also gift a combined $34,000 to Daughter’s spouse.  Daughter has three children, Mom and Dad can gift to each grandchild as well for a total of $102,000.

As the above example shows, it is possible to gift substantial amounts of wealth to others by gifting.  Mom and Dad are able to gift $170,000 each year to their family using the gift tax exclusion.  None of the gifts will be subject to gift taxes or reduce the estate tax exemption because the gifts are all less than the annual gift exclusion.

Gifts can be made in excess of the annual gift tax exclusion amount.  Gifts exceeding the gift tax exclusion will either cause gift taxes to be owed or will cause the person gifting to have their estate tax exemption reduced by the amount of gift exceeding the annual exclusion.  The lifetime estate tax exemption for 2023 will be $12.92 million, up almost one million dollars from 2022.

Consider the following example. In 2023, Dad gifts $1,017,000 to Daughter.  The annual gift tax exclusion will cause $17,000 to be a free gift with no tax consequences.  The remaining $1 million exceeds the annual gift tax exclusion and thus will reduce Dad’s lifetime estate tax exclusion by $1 million.  Dad’s estate tax exclusion will be reduced from $12.92 million to $11.92 million.

Gifting can be an effective means of transferring wealth to other family members or friends.  Before gifting, be sure to seek advice from tax advisor as to the advantages and disadvantages of gifting.  For a thorough discussion of the implications of gifting, see the Gifting Assets Prior to Death bulletin available at farmoffice.osu.edu.