It seems as if half the posts on our site center around navigating the tax code, and today’s post is no different. This is an UPDATE TO A POST from earlier this year on the estate and gift tax levels for 2022. We now have 2023’s numbers and they’ve only gone up again in our favor

Gift Tax Exclusion Increase

Here, we will be discussing two types of taxes: estate and gift taxes. We have covered each of these taxes before so we will be brief here. Starting with the most straightforward tax that most of us may have to deal with at some point - the gift tax. The gift tax is simply a tax on the value of a gift given from one person to another. It’s the giver who pays the taxes, not the recipient as the government wants to make it a little harder to simply give away all your money so they can get you with the estate tax, which we’ll cover in a moment. However, there is a gift tax exclusion limit meaning the gift tax itself does not kick in until you give away a certain amount to a certain person within a year. In 2022, that number was $16,000, but for next year, 2023, it has been raised to $17,000.

For an example, I can give my son $17,000 in 2023, and no gift tax will be owed. Additionally, remember, as this tax is levied per giver (or donee), it only kicks in if I give more than $17,000 to a single person. Thus, I can give my son $17,000, my wife can give him $17,000, and each of us can give $17,000 to each of our siblings and the IRS, ostensibly, doesn’t care - no taxes are due. The same holds true for your state tax board, unless you live in Connecticut or Minnesota. For some reason, only those two have a state gift tax. For completeness’s sake, if I were to give my son $18,000 in 2023, then I would have to pay a gift tax (40%) on the amount over the exclusion, $1,000, meaning I would then owe Uncle Sam $400 in gift taxes.

Estate/Death Tax

Leading into the estate tax, there is a lifetime gift tax exclusion that I could apply that extra $1,000 towards, and thus not have to pay a tax. It just so happens that the lifetime gift tax exclusion limit is equal to the federal estate tax exclusion limit - which in 2023 has been raised from $12.06 million to $12.92 million. Almost a lucky $13 million even, but alas, when the government was calculating what the increase would be, inflation was only at 7.13%. With that, any money I give over the yearly gift tax exemption level, I can apply towards my lifetime gift tax exemption level and still likely not pay a tax. Your yearly exemption amount resets every year, while your lifetime exemption amount, obviously, is what it is and doesn’t reset. If you go over your lifetime gift tax exemption, then you as the giver, will owe a tax of 40% of that overage. Additionally, the IRS will know as if you are applying gifted assets to that lifetime exemption, then you must file a gift tax return, even if you don’t owe taxes on it.

And as a side note, if the lifetime gift tax exemption level were to ever reset to a lower number than what you already gave away during your life, then that’s fine. You won’t owe any taxes, but you won’t be able to give away anymore and escape a tax unless or until the exemption gets increased again. However, it takes an act of Congress and the President to do so don’t hold your breath.

On another note, the estate tax is sometimes called the death tax. It is a tax on the value of your estate, after death, over the exclusion limit. The amount varies based on how much is subject to the tax with a flat amount owed plus a percentage, but a good rule of thumb is if the taxable amount is between $1 and $1million, then the rate is anywhere between 18% and 40%. Of course, it’s a higher rate the more money is subject to the tax and anything above $1million, just think 40%.

There are ways to navigate around the estate tax, as well as other estate planning related taxes, but that is a topic we have covered specifically in a dedicated post HERE.

Future Changes

A quick word of caution. The gift and estate tax levels are only where they are now due to the 2017 Tax Cuts and Jobs Act (the Trump tax cuts). However, that Act is set to sunset in 2025. That means, if Congress and the President, whoever they may be, do not pass legislation in 2025 addressing the estate and gift tax levels, then they revert to the levels set out in the 2012 American Taxpayer Relief Act, passed during the Obama administration. The gift tax exemption was $13,000 per year, and the estate tax was $5 million, indexed to inflation. The current estimates are that if the current levels do sunset, they revert, and the estate tax will be in the mid to high $6 million range. Still high, but significantly less than what we can work with now.

Why These Taxes Matter

To close, we wanted to mention a possible use case for taking the time to navigate these taxes. Yes, a hair shy of $13 million is a lot of money. Even $17,000 can be a lot if we aren’t talking about a house or car (things we probably aren’t giving away all too often). However, do you know what else is expensive? Long-term care, whether it be assisted living, skilled nursing, or in-home support services. These are services that will cost between $9,000 and $10,000 per month, out of pocket.

However, what if there was a way to receive assistance to pay for those costs, not have to spend down your estate so it can be sheltered, and avoid the state coming in to collect for what they paid for your care? Well, that is exactly what we do for our clients when we help them qualify for Medi-Cal here in California. Many of our recent posts have been centered on Medi-Cal and how to qualify (you can read our detailed post HERE). As a preview, we do that by utilizing your lifetime gift tax exemption, which is tied to the federal estate tax exemption level. As those numbers go up, it makes it that much easier to qualify and save your estate.

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