What is the New Federal Estate Tax Exemption Amount in 2023?
In 2023 the federal estate tax exemption is $12,920,000 for an individual or $25,840,000 for a married couple.
So how does this affect you?
Put simply, this will only affect you if the total value of your estate exceeds the tax exemption amount.
So that’s it?
Unfortunately no. While the estate tax has traditionally been a concern, most estate planning in California has shifted to probate avoidance planning.
What happens if your estate is over the estate tax exemption amount in 2023?
Then we should talk. If your estate is over the estate tax exemption amount, then your estate may be required to pay a flat 40% estate tax on everything over the threshold.
Federal estate tax exemption 2022: The federal estate tax exemption rate slightly increased from 2022 when it was $12,060,000 per person and $24,120,000 for a married couple.
The new 2023 Estate Tax rate (also known as the estate tax limit 2023) will be effective for the estate of decedents who passed away after December 31, 2022.
Key points: Federal Estate and Gift Tax Exemption 2023
Federal Estate Tax Exemption in 2023
- $12,920,000 for an Individual
- $25,840,000for a Married Couple
California Estate Tax in 2022
- California does not collect an estate tax.
Federal Estate Tax Exemption Sunset Date
- The Federal Estate Tax Exemption Sunset is scheduled for 2026 unless it is extended by congress.
Federal Estate Gift Tax Exemption Amount in 2023 (Annual)
- $17,000 per recipient. (Annual estate gift tax amount)
What Is the Estate Tax Exemption?
The federal estate tax is a tax imposed by the IRS on all property that is transferred from an estate after a decedent’s death. The Estate Tax is not imposed until the total value of an estate exceeds meets a certain threshold.
That threshold is called the Federal Estate Tax Exemption Amount. Estates whose value exceeds the exemption amount are taxed at the federal estate tax rate of 40% in 2023.
The total value of an estate is found by taking the fair market value of the decedent’s assets at the time of death (not when they were purchased).
This is commonly referred to as the decedent’s “Gross Estate”.
After the decedent’s Gross Estate is determined the estate representatives may take certain deductions which will lower the value of the decedent’s Gross Estate.
What is left is the “Taxable Estate”. If the Taxable Estate value is over the current Federal Estate Exemption amount, then the estate will be required to pay the Estate Tax on all amounts over the exemption amount.
Example of How The Federal Estate Tax Exemption Works:
What are Gift Taxes?
Gift taxes are part of the federal taxation system in the United States, serving as a levy on the transfer of property or assets from one individual to another without receiving fair market value in return. Essentially, if you give someone a valuable gift, you may owe a tax on that gift. This applies regardless of whether the giver receives anything in return. The key element in this taxation strategy is the fair market value of the gift, which serves as the base for calculating the potential tax liability. However, not every gift is taxable, as there are certain thresholds and exemptions in place, which leads us to the lifetime gift tax exemption.
What is the Lifetime Gift Tax Exemption and How Does It Work?
The lifetime gift tax exemption is a provision within the IRS tax code that allows each individual to give a certain amount during their lifetime without having to pay gift tax. The amount of this exemption is adjusted periodically for inflation. As of 2023 the lifetime exemption was $17,000 per individual, meaning you could give away that much over your lifetime without incurring the gift tax.
However, any amount used against this lifetime gift tax exemption reduces, dollar-for-dollar, the amount that will be exempt from the federal estate tax upon the giver’s death.
Hence, it’s an essential tool for estate planning, enabling substantial wealth transfer without taxation during the giver’s lifetime. However, if the lifetime exemption amount is exceeded, the excess is subject to the gift tax. It is crucial to keep abreast of changes in these amounts and consult with a tax professional or attorney to best manage one’s estate and minimize tax liabilities.
What is the Annual Gift Tax Exclusion Amount in 2023?
The Internal Revenue Service (IRS) allows for an annual gift tax exclusion of $17,000 per recipient in 2023. This means that you can give up to $17,000 each to any number of individuals, including your children, every year without incurring a gift tax or even needing to report the gift.
This limit applies per person, so if you’re married, you and your spouse can effectively combine this exclusion to gift up to $34,000 to each child without tax implications. Importantly, these annual exclusions are separate from and do not affect your lifetime gift and estate tax exemption. Note, however, that these figures are subject to change due to inflation and potential revisions in tax law, so always consult with a tax professional or attorney for the most current information and personalized advice.
What is Portability?
Portability is a term created under the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”.
The Act allows certain parties to elect to transfer any amounts of the estate tax exclusion that were not used for the decedent’s estate, to the decedents surviving spouse.
How can Portability be used to transfer one spouse’s unused federal exemption amount to their surviving spouse?
This concept is called portability. In order to use portability, the surviving spouse must file IRS form 706.
The surviving spouse may then apply the transferred estate tax exclusion amount received from the estate of their deceased spouse, to offset any tax liability stemming from any future transfers upon death or lifetime gifts.
What new Federal Estate Tax Exemption Means for Estate Planning and your tax rate?
In the past, basic estate planning has included some form of tax planning.
With the increase in the Federal Estate Tax rate in 2012 and the recent increase in 2023, middle-class families are not required to pay an estate tax.
In California, estate planning is still highly recommended for anyone who:
- owns real estate;
- has assets valued over 166,000; or
- those with minor children.
For individuals who are over the exclusion, the amount of taxes can still be avoided with proper estate planning and asset protection.
Is there an estate tax at the state level?
Luckily, residents of California do not need to worry about the California Estate Tax. California does not collect an estate tax.
What is California’s Estate Tax in 2023?
The “California Inheritance tax” or “California death tax” are simply synonyms for Estate Tax. As of the writing of this post, there is currently not a California Death Tax or an Inheritance tax in California.
With that said, California residents still may have to pay the Federal Estate Tax. This is why proper tax planning is important if your estate exceeds the exemption amount in 2023.
What is California’s gift tax in 2023?
Currently (as of 2023) California does not have a gift tax.
The Value of your Business is Included in the Total Value of your Estate when Calculating your Tax Rate
As a business owner or professional practice owner, your business is likely a large part of your wealth.
Thus, the value of your business may put you over the total value of your estate over the tipping point for having to pay the federal estate tax.
There are many strategies to put in place a business succession plan to avoid including your business in your total estate value.
With that said it is imperative that you plan ahead of time.
Regardless of whether you are a sole proprietor, LLC, corporation, partnership, or Professional Corporation, this will help you make sound decisions for the successful transfer of your business.
All while saving on unnecessary transfer and estate taxes.
How Can Opelon LLP Help You Plan to Maximize Tax Savings with the Current Estate and Gift Taxes?
If you are concerned about having to pay the federal estate tax, or unsure about your tax rate, let the estate planning attorneys at Opelon LLP help you create an estate planning strategy to offset any tax liability.
We offer free consultations as well as in-person and virtual meetings. You can schedule an appointment directly by clicking here or by calling our office a call at 760-278-1116