Client Update — 2023 Estate and Gift Tax Exemptions

With a new year comes updated exemptions for estate tax exclusion and gift tax for 2023.

What is the “estate tax exemption” and where is it going in 2023?

The estate tax exemption is the amount of non-charitable bequests that can pass tax-free to someone other than your spouse upon your death. For 2023, the federal estate tax exemption will increase from $12,060,000.00 to $12,920,000.00, to reflect inflation. This is one of the largest year-to-year increases in memory, largely driven by the fact that the federal estate tax exemption is tied to the rate of inflation. A married individual has an unlimited exemption to a surviving spouse and, under certain conditions, upon the surviving spouse’s death, he/she can combine his/her exemption with whatever unused exemption remains from his/her predeceased spouse (called “portability”).

What is the impact of lifetime gifts on your estate tax exemption?

Your estate tax exemption will be limited by the cumulative amount of annual lifetime gifts that you have made. However, the “gift exemption” is the amount that you can gift annually (to someone besides a spouse or charity) without reporting the gift to the Internal Revenue Service. And it is only these reported gifts that reduce your estate tax exclusion.

What is happening to the federal gift exemption in 2023?

For 2023, the federal gift tax exemption will increase from $16,000.00 to $17,000.00. This means that each individual can gift up to $17,000.00 to as many recipients as he/she would like without the gift reducing their lifetime estate tax exemption (and without reporting the gift by filing a gift tax return). Many couples utilize their annual gift exemption amount to make yearly tax-free gifts to children and grandchildren (or to 529 plans) without reducing their estate tax exemption. Remember that only reported lifetime gifts reduce the estate tax exemption and a gift that is $17,000.00 or under need not be reported.

What about state estate tax exemptions?

Maryland and DC residents should bear in mind that, although the federal estate tax exclusion is extraordinarily high, both Maryland and the District of Columbia assess state estate tax.

Maryland’s estate tax exclusion remains $5,000,000.00. Under certain circumstances, a surviving spouse can “port” their deceased spouse’s unused exemption to increase their exemption to up to $10,000,000.00.

The District of Columbia estate tax exclusion will increase from $4,254,000.00 to a yet-to-be-determined amount because it too is tied to the rate of inflation. However, District of Columbia couples, unlike Maryland couples, do not have “portability” available to them. Therefore, a surviving spouse will only receive his/her exemption without having available their deceased spouse’s unused exemption. The District of Columbia remains one of the most aggressive jurisdictions in the country when it comes to estate tax.

What does the future hold?

We don’t know. Estate tax is often a hot-button political issue. We will continue to monitor the political headwinds with a change in gubernatorial administration in Maryland and a change in the political party in control of the United States House of Representatives to alert clients as to any changes in estate and gift tax laws.

If you’d like to chat about your estate plan, please contact Jeremy Rachlin at (301) 656-1177, or jrachlin@bulmandunie.com to schedule a discussion.