Estate Tax Exemption Amount Goes Up in 2023

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Every year, the IRS announces new limits on the estate tax exemption for the upcoming year. It is the amount of money people can give away without having to pay a federal estate tax. The number is primarily for rich people who have large amounts of money.

The federal estate tax exemption has been raised from $12,060,000 to $12,920,000 for 2023. It means that a millionaire (or billionaire) can give away this amount, and a couple could give away $25.84 million without having to pay any taxes on the money.

The $12.92 million exemption is a lifetime gift tax exemption. It is the maximum amount that you can give away over your lifetime.

The tax exemption amount is based partly on inflation and is adjusted annually. In 2026, however, the limit will revert to $5,000,000. With inflation, it will likely be around $7,000,000.

Forbes warns that you need to pay attention when 2025 arrives, especially if you want to give away more money. If you do not give away $12,920,000 by 2025, when it reverts to $7 million, you will have lost the opportunity to give away another $6 million without taxes.

When an estate has more money than the exempted amount, the taxes will be 18–40 percent. Everything above $1 million or more above the exemption limit is taxed at 40 percent.

Differences Between Estate and Inheritance Taxes

The Urban Institute says estate taxes are levied on the value of the estate when someone dies. An inheritance tax is charged against the value of the portion given to the heir.

Spousal Limits on Inheritances

A surviving spouse does not need to pay any inheritance taxes when a spouse dies. The exception is when a surviving spouse is not a U.S. citizen. In that case, the deduction will be $164,000 in 2022, and $175,000 in 2023.

State Taxes on Estates

Where you live determines whether or not you will pay state estate taxes. Most states do not impose a state estate tax, but 17 states do, along with the District of Columbia. The exemption amounts at the state level are usually much lower than at the federal level.

Gift Tax Exemption

One tax-free way to give away your money before you die is give it to your benefactors. In 2022, you can give gifts up to $16,000 per person. This figure has been raised to $17,000 for 2023. It is deductible on your taxes.

The $17,000 limit is for one person. It means a couple could give twice as much to the same person if they wanted, or $34,000.

If you want to pay for someone’s medical bills, according to MarketWatch, you can pay for them—it will not count toward the gift tax limit. The same is true for payments made to an educational institution for someone else.

Money put into a grandchild’s 529 account for education is another way to gift money. A couple could put as much as $160,000 into a 529 plan because you can give five years’ worth of contributions at a single time. Starting in 2023, the money in a 529 will no longer count as income on a student’s Free Application for Federal Student Aid (FAFSA), which means it will not interfere with other sources of financial help.

Inheritance Taxes

When an heir receives the assets in an estate, some states will require taxes. Only six states have inheritance taxes: Iowa, Maryland, Nebraska, Kentucky, New Jersey, and Pennsylvania. Only Maryland has an estate tax and an inheritance tax. Spouses do not pay taxes on inheritance in any of those states.

Avoiding Double Taxation

In case you are wondering, the federal government has created a way for an estate to avoid double taxation. SmartAsset says the estate tax prevents this problem.

When an estate still generates income after the property owner dies, money could still come in from the sale of a property. Money could also come in from interest, rent, or dividends, and it is probably taxable, says NerdWallet. That income is called income in respect of decedent (IRD).

When filing taxes, taxes paid on the estate get subtracted from the income on the IRD. Schwab says this action prevents double taxation.

File the tax return on time. Coompia77/Shutterstock

How to Avoid or Reduce Estate Taxes

1) Give Personal Gifts

Give gifts valued at $16,000 or less (in 2022 and $17,000 in 2023) to as many people as you want. You can do this each year—and even give it to the same person each year if you want—but avoid exceeding the lifetime gift exclusion amount.

NerdWallet mentions that even if you give more than $16,000 in one year to one person, you probably will not need to pay a gift tax. You will need to file a gift tax return, but the excess money will probably be counted against your lifetime gift exclusion.

2) Make Donations to Charity

SmartAsset mentions that you can also give gifts to charity through charitable trusts. The two choices are charitable lead trusts (CLTs) and charitable remainder trusts (CRTs).

A CLT gives some of your assets to a charity, which reduces your taxable estate. After a specified period—or when you die—the remaining assets are distributed to your beneficiaries.

In a CRT, you transfer stock or other income-producing assets to an irrevocable trust. While you are living, you can get an income from it. When you die, your investment income goes to the charity. It enables you to lower your estate’s value and avoid the capital gains tax.

3) Buy Life Insurance

It takes time to settle an estate. Hopefully, your beneficiaries will not need to sell your assets at a discount to raise money for taxes. You could solve this problem by buying life insurance to cover the various taxes that your beneficiaries will need to pay before your estate is settled.

The best way to do this is to set up an irrevocable life insurance trust (ILIT) soon and transfer the policy to the trust. It ensures that estate taxes do not need to be paid on the policy amount—which could go to the estate, SmartAsset says, if you die within three years after making the transfer.

There are several ways to reduce your estate without having you or your heirs pay taxes on it. Taking steps now while you can enable you to see your heirs benefit from some of the money now. Contact an estate planner to learn how to ensure your beneficiaries will get the most money from the lifetime gift tax exemption.

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