Estate and Gift Tax Exemptions Increase in 2023, Generous Break for Wealthy Americans

Inflation’s bite has propelled the federal government to hike tax brackets and standard deductions, not to mention impose the largest cost of living adjustment for Social Security income in four decades. Meanwhile, wealthy Americans are also reaping the tax-free perks — a bigger estate tax exemption for 2023.

The estate tax exemption allows people to pass on wealth to their heirs without a massive tax bill, and people will soon be able to send more money while remaining under the threshold for tax exemption.

In the name of fairness or compliance, the IRS has increased the limit for estate tax exemptions as it also adjusts other key tax thresholds for inflation.

An estate tax exemption refers to a tax break that Americans receive if they transfer their estate to their heirs. The value of the estate must be below the estate tax exemption limit in order to avoid taxes. Estates can be transferred in life or after a person has died. If the value of the estate is over the limit, the recipient is required to pay taxes on the estate. Estate taxes are typically 18 percent–40 percent at the federal level, plus additional taxes at the state level.

In 2022, the estate tax exemption limit is $12.06 million. This means any estates carrying less than $12.06 million in value are exempt from taxes. For 2023, that limit is jumping 7.13 percent to $12.92 million.

This adjustment is actually below the inflation rate (which is up 8.4 percent in the 12 months ending in September, according to the Bureau of Labor Statistics). However, it does give wealthy Americans more wiggle room for passing on their estate now or in the future.

The IRS is also making changes for gift tax exemption limitations, which is increasing to $17,000 for calendar year 2023, up from $16,000 for the current year.

Altogether, the gift tax and estate tax exemption increases provide an opportunity for wealthier Americans to optimize their tax bill. Experts say it may not last, so take advantage of it now. In 2017, under the leadership of then-President Donald Trump, a Republican-led tax overhaul lowered the tax rate for the top bracket, doubled the estate tax exemption, created a big deduction for pass-through income, and trimmed corporate taxes. If not renewed, this legislation may phase out beginning in 2025, which could mean the generous estate and gift tax exemptions won’t be around forever.

If you want to give a gift or pass on an estate while you’re alive, this year may be as good a time as any to do so. Tax attorney Adam Brewer told reporters this year is a “very big year for estate planning,” particularly for the ultra-wealthy Americans of the bunch.