Gift and estate taxes apply, in certain cases, to large gifts made by a person during their lifetime or by their estate after their death. One critical purpose of financial planning is minimizing the impact of gift and estate taxes.
Every year, the IRS adjusts amounts exempt from federal gift and estate taxes to consider inflation. Also, Congress sometimes makes laws with provisions that expire. Knowing these exemptions and provisions is important when establishing the gifting strategies to support your loved ones now or in the future.
Here’s what you need to know about the 2023 gift and estate tax exemptions:
What are gift and estate taxes?
Gift tax is a tax on large gifts given while a person is still alive, whereas estate taxes are assessed on the value of a decedent’s estate before it is given to the person’s heirs.
For those with a large estate, gifting to your children and grandchildren during your lifetime can help to limit your estate’s tax burden at the time of your passing. This gift tax isn’t limited to cash gifts; it can include other high-value gifts like stocks, a house or a car.
Many Americans will never have to pay gift or estate taxes to the federal government, due to a number of exemptions. Certain gifts are totally exempt from the gift tax. These tax-free gifts include:
- Charitable donations
- Payment of tuition and educational fees (paid directly to the institution)
- Payment of medical expenses (paid directly to the hospital or provider)
- Gifts to spouses
- Political contributions
In addition to these exemptions, many Americans take advantage of the annual gift tax exclusion and the lifetime gift and estate tax exemption. These exemptions are updated annually.
Annual gift tax exclusion
In 2023, you can give an unlimited amount of people a maximum of $17,000 each (or, alternatively, $34,000 to a married couple) in a single year without triggering the gift tax. If your gift exceeds $17,000 to any one person during a calendar year, you are required to report it on a gift tax return (the caveat being that both you and your spouse can give the maximum amount, so together you can give one person up to $34,000). Only once you, individually, surpass the $17,000 limit will your gift count towards the lifetime gift and estate tax exemption.
Lifetime gift and estate tax exemption
Over the course of your life, or as a part of your estate, the IRS allows a person to give away a certain amount of assets without triggering the gift or estate tax. In 2023, the IRS expanded the lifetime gift and estate tax exemption to $12.92 million (or $25.84 million for married couples).
When thinking about the lifetime gift and estate tax exemption, people should keep in mind that in 2026 this amount will revert back to the prior exemption amount of approximately $7 million—unless Congress takes action sooner.
Part of a comprehensive plan
We regularly work with clients to help optimize their gifting strategies, not only with respect to taxes, but to best fulfill the purposes closest to their hearts. Our approach is to focus on estate and gift taxes in a highly individualized manner as an inherent part of the planning process.
Further reading:
This Schwab article covers some of the same ground we covered here, plus an overview of minimizing taxes for recipients and ideas for gift-giving when direct payment to the recipient doesn’t make financial sense.
This SmartAsset article includes a handy reference table for calculating gift taxes.