IRS Increases Tax Breaks for Gifts, Estates and Capital Gains

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The income thresholds that trigger some important taxes are changing in 2023, the IRS has announced.

The agency is making the changes to account for inflation. The moves will mostly impact wealthy taxpayers, although some folks in the middle class also likely will benefit.

Following are definitions of the three key taxes that are impacted and explanations of what will be new in 2023.

What is the gift tax?

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When you give a certain amount of money or other property to someone, it is considered a gift — whether or not you intended it that way. Such gifts are subject to a tax. Here is how the IRS defines the gift tax:

“The gift tax applies to the transfer by gift of any type of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.”

Typically, the person giving the “gift” is responsible for paying the tax. In 2022, giving property to someone that exceeds $16,000 in value makes the transfer subject to the gift tax.

There are several situations where the gift tax does not apply, including:

  • Gifts to a spouse
  • Gifts that pay the tuition or medical expenses of someone
  • Gifts to a political organization intended for its use

Gift tax exclusion for 2023

cash gift
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In 2023, you will be able to give a little more without triggering the gift tax. The new limit will be $17,000, up from $16,000 this year. Until you exceed that limit, you will not owe any tax.

The limit applies “per donee.” So, for instance, you can give three gifts of $17,000 to three separate people next year and not trigger the tax.

What is the estate tax?

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The estate tax is a levy applied to property that is transferred from you to someone else after your death. Often disparaged as the “death tax,” the federal estate tax kicks in at $12.06 million in 2022. That means very few people pay it.

However, for those who are rich and intend to pass down wealth to loved ones, the estate tax is among the most irksome taxes in the federal code.

Estate tax exclusion for 2023

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The estate tax exclusion will grow in 2023, to $12.92 million from $12.06 million in 2022. That means that until your estate exceeds $12.92 million, you will not owe any tax.

Even if you escape paying the federal government, your heirs will need to watch out for the tax collectors in the state in which you lived and died. Many states have their own estate taxes, as we note in “17 States With Inheritance or Estate Taxes — or Both.”

What are capital gains taxes?

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Chances are good that you are sitting on a mountain of capital assets. These are things that you own either for personal use or for the purposes of investment. Among the many examples of capital assets are:

  • A home
  • Household furnishings
  • Stocks and bonds

When you sell one of these assets, you generally owe a capital gains tax on “the difference between the adjusted basis in the asset and the amount you realized from the sale,” according to the IRS. In most cases, this “adjusted basis” is the price you paid for the item.

Generally, you must hold a capital asset for more than one year before selling to qualify for the long-term capital gains rate. This is just 15% for most people, although it is higher in some situations, particularly for those whose taxable incomes cross specific thresholds.

If you sell a capital asset before one year, you are stuck with a short-term capital gain, and you usually pay much higher taxes, depending on your income.

Maximum capital gains rates for 2023

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In 2023, the income thresholds for the 0%, 15% and 20% capital gains rates are increasing. That means you will be able to earn more money before the capital gains tax rate affects you.

Income thresholds for long-term capital gains rates will be as follows:

Single filers

  • 0% — taxable income up to $44,625
  • 15% — taxable income from $44,626 to $492,300
  • 20% — taxable income of $492,301 or higher

Married filing jointly

  • 0% — taxable income up to $89,250
  • 15% — taxable income from $89,251 to $553,850
  • 20% — taxable income of $553,851 or higher