Federal Gift and Estate Tax Breaks due to Inflation

Inflation-Adjustment Basics

Many federal tax parameters are indexed annually for inflation using a factor based on the monthly average of changes in the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), as calculated by the U.S. Bureau of Labor Statistics. Due to the way increases in the C-CPI-U numbers are calculated, during periods of high inflation, inflation adjustments can be slightly lower than increases in the regular Consumer Price Index (CPI-U) that are reported by the news media.

For the federal tax parameters that are covered in this article, the inflation adjustments for each year are based on the average of monthly C-CPI-U changes during the 12-month period ending on August 31 of the previous year.
For the 2023 tax year, inflation adjustments are based on the C-CPI-U changes for the measurement period from September 1, 2021, to August 31, 2022. For the 2024 tax year, inflation adjustments will be based on the C-CPI-U changes for the current measurement period from September 1, 2022, to August 31, 2023.

It’s currently unclear whether the inflation adjustment factor for the 2024 tax year will be as high as it was for 2023 (7%). We’ve provided estimates of federal tax parameters in the main article, assuming a C-CPI-U factor of 4% for 2024. Stay tuned: The IRS will publish the actual inflation-adjusted amounts in October.

June 21, 2023

Inflation is generally bad news, however; it does bring tax breaks in the form of bigger annual inflation adjustments. In fact, many federal tax parameters for the 2023 tax year are up about 7% over the amounts for 2022. Here are the details — plus inflation-adjusted estimates for the 2024 tax year to tide you over until the actual numbers are published in October (NOTE: read IRS rate adjustments here: www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024).

Annual Federal Gift Tax Exclusion

The annual federal gift tax exclusion for 2023 is $17,000 per gift recipient (up from $16,000 for 2022). Gifts up to the exclusion amount don’t reduce your unified federal gift and estate tax exemption. The exclusion amount is the maximum that you can give away during 2023 to a single gift recipient without any federal gift or estate tax impact.

The annual federal gift exclusion is increased for inflation only in $1,000 increments (so some years, it doesn’t increase at all). The inflation factor that’s used for federal tax parameters is called the Chained Consumer Price Index for All Urban Consumers. It is at 4% for 2024, and the exclusion will remain at $17,000 for 2024. (See “Inflation-Adjustment Basics,” at right.)

Unified Federal Gift and Estate Tax Exemption

For individuals who make gifts in 2023 or die in 2023, the unified exemption is $12.92 million (up from $12.06 million for 2022). That’s an increase of $860,000 over 2022.

Thanks to the portable exemption privilege, the 2023 unified exemption for a married couple is effectively doubled to $25.84 million ($12.92 million times two). That’s an increase of $1.72 million over 2022.

These increases are good news for high-net-worth individuals — especially those who previously made “taxable gifts” that exceeded the annual federal gift tax exclusion. These individuals can now make significant additional gifts or leave significantly larger estates without incurring additional federal gifts or estate tax.

The unified federal gift and estate tax exemption is increased for inflation in $10,000 increments. If the inflation factor that’s used for federal tax parameters is 4% for 2024, the exemption will approach $13.44 million for 2024 ($26.88 million for a married couple).

Generation-Skipping Transfer Tax

Federal generation-skipping transfer tax (GSTT) can potentially hit transfers of wealth to individuals who are more than one generation below you — for example, your grandchildren. The annual exclusion for generation-skipping gifts is the same as for the regular annual gift tax exclusion. So, the exclusion is $17,000 for 2023 (up from $16,000 for 2022).

The GSTT exemption for lifetime gifts and bequests is the same as the regular unified exemption. So, the GSTT exemption is $12.92 million for 2023 ($25.84 million for a married couple). For 2022, the exemption was $12.06 million ($24.12 million for a married couple).

Noncitizen Spouses

The unlimited marital deduction privilege allows unlimited wealth transfers between citizen spouses, while alive or at death, without any federal gift or estate tax liability. Unfortunately, noncitizen spouses are ineligible for this privilege.

On the plus side, noncitizen spouses are eligible for a much larger annual federal gift tax exclusion than other recipients. For 2023, the exclusion is $175,000 (up from $164,000 for 2022).

So, a U.S. citizen can give up to $175,000 in 2023 to a noncitizen spouse without using up any of the citizen spouse’s $12.92 unified federal gift and estate tax exemption. But, if the citizen spouse dies in 2023, amounts left to a noncitizen spouse will be included in the deceased citizen spouse’s estate. These amounts can then be sheltered by the deceased citizen spouse’s remaining federal estate tax exemption of up $12.92 million.

If the inflation factor that’s used for federal tax parameters is 4% for 2024, the gift tax exclusion for a noncitizen spouse will increase to about $182,000 for 2024.

Lessons Learned

Big inflation adjustments to the federal gift and estate tax parameters are good news for high-net-worth individuals. If you fall into that category, you have expanded opportunities to transfer wealth without any negative federal gift or estate tax consequences.

GRF Can Help

This is a limited-time opportunity: The current unified federal gift and estate tax exemption is scheduled to revert to the 2017 level (adjusted for inflation from 2018 through 2025) unless Congress extends the more generous exemption. Contact your estate planning or tax advisor, or the GRF Tax Team to make sure you’re taking full advantage of today’s favorable gift and estate tax rules.