Many people are concerned about the impact of taxation on estates. There is an estate tax and there is also a gift tax. The gift tax is intended to stop people from giving gifts to avoid the estate tax. We will look at the 2023 gift tax exemption in this post, but first, we will go over taxes in a more general sense.
Income Taxes and Capital Gains Tax on Inherited Income
You do not have to report an inheritance that you receive through the terms of a will when you file your income tax returns. Life insurance policy proceeds fall into this category as well.
With regard to the capital gains tax, inherited assets get a step up in basis. An inheritor is not responsible for capital gains that accumulated during the life of the decedent.
The basis would be reset at the time of acquisition. As a result, the inheritor would only be on the hook for future gains.
Why are inheritances considered to be tax-free income? To explain through the utilization of a simple example, let’s say that you save five percent of your net pay for many years. You live within your means, and you develop a nest egg to draw from during retirement.
As it turns out, you never need the money, and you are going to leave the savings account to your only child. You paid taxes before you deposited the money into the account. The inheritance that your child will receive is the remainder that was left over after you paid taxes.
If the inheritance was taxable, it would be an instance of double taxation. This would not be fair. This makes all the sense in the world, but it goes out the window if your savings exceed a certain amount.
Federal Estate Tax
The federal estate tax packs a wallop with a 40 percent maximum rate. However, you do not have to pay the tax unless the value of your estate exceeds the credit or exclusion.
In 2017, the exclusion was $5.49 million. In December of that year, the Tax Cuts and Jobs Act was enacted. This measure increased the exclusion to $11.18 million in 2018, and this figure adjusted for inflation has been in place since then.
For the rest of 2023, the exclusion will be $12.92 million. We should point out the fact that the relevant provision in the Tax Cuts and Jobs Act will expire at the end of 2025.
If there are no changes between now and then, the exclusion will go back to $5.49 million adjusted for inflation in 2026.
You can transfer any amount of property to your spouse tax-free, because there is an unlimited spousal deduction. The one caveat to this statement would be the stipulation that this marital deduction is only allotted to American citizens.
Since 2011, the estate tax exclusion has been portable between spouses. In tax parlance, the word “portability” refers to the ability of the surviving spouse to use the exclusion that was allotted to their deceased spouse.
2023 Gift Tax Exemption
A gift tax has been in place since 1932. The purpose of this tax is to stop people from giving gifts while they are living to avoid the estate tax. It was unified with the estate tax during the 1970s. The $12.92 million exclusion that we looked at is a unified exclusion that applies to lifetime gifts and your estate.
However, there is a separate annual per person gift tax exemption that can be used to give a certain amount to an unlimited number of gift recipients in a given year in a tax-free manner.
There can be adjustments when a new year rolls around to account for the cost of living. A lot of people were wondering if there would be an increase in 2023. In fact, the exclusion was increased from $16,000 to $17,000.
In addition to this annual exclusion, there are two other ways you can give tax-free gifts. You can pay medical bills and school tuition for others.
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If you have tax concerns, we can help you implement a tax efficiency strategy, and we can provide assistance if your estate will not be exposed to taxation.
The ideal way to proceed will depend on the circumstances, so personalized attention is key. This is exactly what you will receive when you choose our firm.
You can schedule a consultation at our Oklahoma City estate planning office if you call us at 405-843-6100. You can reach our Tulsa office at 618-615-2700. Alternatively, you can fill out our contact form if you would like to send us a message.
After helping his own family deal with a lengthy probate and the IRS following his father’s untimely death in a farm accident, Larry Parman made a decision to help families create effective estate plans designed to reduce taxes, minimize legal interference with the transfer of assets to one’s heirs, and protect his clients’ assets from predators and creditors.