The American Taxpayer Relief Act of 2012 (ATRA) was the first piece of legislation to set a permanent estate tax and gift tax exemption (“exemption”). Initially, ATRA set the exemption at $5,000,000 per person, indexed for inflation. When the Tax Cuts and Jobs Act of 2017 (TCJA) was passed, the exemption increased to $11,180,000 per person. That amount has been annually adjusted upward for inflation, and in 2023, the new exemption amount is set to be $12,920,000 per person and $25,840,000 per married couple. This is a significant increase from the $12,060,000 ($24,120,000) amount of 2022.
The gift tax annual exclusion allows a taxpayer to gift a certain amount to a recipient each year without using any of the taxpayer’s lifetime exemption amount. In 2022, the annual exclusion amount was $16,000, or $32,000 for a married couple choosing to split gifts. For 2023, the annual exclusion amount has increased to $17,000, or $34,000 for a married couple choosing to split gifts. For example, it is expected that a married couple with four children will be able to gift $136,000 ($34,000 to each child) in 2023 without using any of their estate and gift tax exemption amounts. This means that any individual can give up to $17,000 to any other person(s) without incurring gift tax consequences or reducing their remaining exemption. Married couples can also gift‐split and effectively gift $34,000 to any donee. For example, if an individual has already used all their $12,060,000 exemption, as of January 1, 2023, 2 they could gift an additional $860,000 (utilising the increased exemption amount) and make as many $17,000 gifts to individuals as they would like without any gift tax concerns. All of these funds would also be removed from their estate for estate tax purposes.
The TCJA tax cut is set to expire at the end of 2025. Therefore, if Congress does not take action to extend the current increased exemptions, as of January 1, 2026, the exemption will revert to the ATRA level of $5,000,000, indexed for inflation.