Estate and gift taxes are levied on transfers of property during lifetime and at death. The federal government and many state governments impose such taxes and adjust the amounts subject to tax annually for inflation (or deflation).
In general, outright transfers between United States citizen spouses and transfers to certain qualifying trusts for U.S. citizen spouses are generally not taxed. In addition, the Internal Revenue Code exempts a certain amount transferred from federal estate tax. The federal estate and gift tax exemption amount for estates of decedents dying on or after January 1, 2023 is $12.92 million, increased from $12.06 million for estates of decedents dying on or after January 1, 2022.
The exemption amount may be applied to gifts made during lifetime (in excess of the gift tax exclusion amount – explained below) and transfers made at the time of death. The federal estate tax exemption is portable between spouses who are U.S. citizens, which means that the estate of the first spouse to die may elect to pass any of the decedent’s unused exemption to the decedent’s surviving spouse. Absent congressional action, the all-time high unified exemption amount is scheduled to sunset on January 1, 2026, returning to approximately $6 million.
The annual federal gift tax exclusion amount is the total value of gifts that can be made in a calendar year by one person to each of an unlimited number of people before the federal exemption is consumed. This figure has increased from $16,000 to $17,000 as of January 1, 2023. The gift tax exclusion amount is per donor, meaning that a married couple can gift up to $34,000 to an individual, per year. This is the second annual inflation adjustment after a three-year period without inflation adjustments in years 2019 through 2021.
The federal gift and estate tax rate on amounts over the exempt amount is 40%.
The table below provides the applicable state estate tax exemption amounts for decedents dying on or after January 1, 2022 and January 1, 2023, and the associated estate tax rates in states where Pierce Atwood’s Trusts and Estates attorneys practice. Unlike the federal exemption, these states do not allow portability of unused exemption between spouses, nor do they impose state gift taxes on lifetime transfers.
*The Massachusetts figure is less an exemption than a threshold, since all assets are taxed if the estate is valued at more than $1 million.
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