We have been sharing updates about changes to government parameters that are relevant to estate planning and elder law matters. Each year, certain figures are adjusted to account for inflation, and there was a significant level of inflation in 2022.
In this post, we are going to take a look at the federal estate tax and gift tax exclusion increases for 2023.
Unified Federal Estate and Gift Tax Exclusion
It would be easy to limit your estate tax exposure if you could simply give large lifetime gifts to avoid taxation. This was possible when the estate tax was originally enacted in 1916. However, a gift tax was put in place in 1924. It was repealed a couple of years later, but it was reenacted in 1932. There has been a gift tax in the United States ever since then.
These days, the gift tax and estate tax are unified under the tax code. As a result, the primary exclusion is a unified exclusion. It applies to large lifetime gifts and the estate that will be transferred after your passing.
This exclusion is an amount you can transfer tax-free, and anything that exceeds this amount would be taxable. In 2022, the exclusion was $12.06 million, and it has been increased to $12.92 million this year.
We should point out the fact that there is an unlimited marital deduction. It allows for unlimited tax-free transfers between spouses that are American citizens. Since 2011, the estate tax exclusion has been portable. This means that a surviving spouse can use their deceased spouse’s exclusion.
In addition to the unified exclusion, there is a separate annual gift tax exclusion. It gives you the ability to transfer a certain amount to an unlimited number of individual recipients each year tax-free without using any of your unified exclusion.
This annual exclusion was $16,000 in 2022, and it has been bumped up to $17,000 for 2023.
While we are on the subject, there are a couple of added gift tax exemptions. You can pay school tuition for others without being taxed, and there is a medical exclusion. If you want to pay health care bills or health care insurance premiums for others, transfer taxes do not apply.
Connecticut State Estate Tax
Connecticut is one of 12 states in the union with a state level estate tax. Last year, the exclusion was $9.1 million. This year, due to state legislative mandate, the exclusion is going to be equal to the federal estate tax exclusion. There is just a single state with a state level estate tax that also has a gift tax, and that state is Connecticut.
Speaking of the other states with estate taxes, if you own property in any of them, that tax would apply to your estate if its value is greater than the exclusion in that state.
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Mr. Karpe is licensed to practice law before the courts of the States of Connecticut and Colorado, the U.S. District Court for Connecticut, the U.S.District Court for Colorado, the United States Supreme Court, and the U.S. Tax Court. He is a member of the Connecticut and Hartford County Bar Associations as well as the Estate and Probate Section of the Connecticut Bar Association. In addition, he is a member of the American Academy of Estate Planning Attorneys, the National Academy of Elder Law Attorneys and Planned Lifetime Assistance Network of Connecticut.