The IRS recently released Revenue Procedure 2022-38, which contains inflation adjustments for 2023. Revenue Procedure 2022-38 discusses increases to many individual tax benefits, including increases to the gifting and estate tax exemptions, kiddie tax thresholds, and various deductions and credit limitations.
First, the estate and gift tax exemption and the generation skipping tax (GST) tax exemption will be increasing. The 2022 limitation is set at $12,060,000 which will increase to $12,920,000 as of January 2023, and $860,000 increase per taxpayer. These exemptions allow taxpayers to transfer wealth gift and estate tax free during lifetime and at death up to these limits creating planning opportunities for those with substantial wealth. The GST exemption allows taxpayers to transfer wealth to a generation below their direct descendants, typically grandchildren and grand-nieces and -nephews. With these new limitations in place, individuals will have the capability to gift a total of $1.22M more than allowed in 2021.
Also increasing in 2023 is the gift tax annual exclusion – taxpayers will be able to gift $17,000 to each donee before reporting the gifts on a gift tax return. This annual exclusion is up from $16,000 allowed in 2022 and $15,000 allowed in 2021. The annual exclusion remained at $15,000 from 2018 to 2021, seeing the first increase in four years in 2022. The unlimited educational and medical exclusion is still effective in tax years 2022 and 2023. This allows a donor to pay for unlimited medical and educational expenses of another gift and GST tax free when paid directly to the provider.
Additionally, the kiddie tax threshold increases in 2023. For tax year 2022, the first $1,150 of a child’s unearned income is tax free due to the kiddie tax standard deduction. Beginning in 2023, the kiddie tax standard deduction will increase to $1,250. The first $1,250 of a child’s unearned income in 2023 will be tax free, the second $1,250 will be taxed at the child’s marginal rate and any amount more than $2,500 will be taxed at the parents’ marginal rate. This is an increase from $2,300 in 2022.
Lastly, Revenue Procedure 2022-38 discloses many changes in relation to credits and deduction for tax year 2023. Some of the individual taxation changes included in this revenue procedure are the following:
- The standard deduction for married couples filing jointly for tax year 2023 will be $27,700 (up $1,800 from 2022) and for single taxpayers; $13,850, (up $900 from 2022).
- The maximum adoption credit allowed in 2023 will be $15,950. The credit completely phases out for taxpayers with modified adjusted gross income of $279,230.
- The educator expense deduction increases to $300 in 2023, up $50 from 2022. Eligible educators can deduct books, most supplies, computer equipment and related software and supplementary materials used in the classroom.
- The alternative minimum tax (AMT) exemption increases to $126,500 for joint returns and surviving spouses and $81,300 for single taxpayers. The exemption phase outs for joint and surviving spouse are $1,156,300 to $1,662,300 (Single $578,150 to $903,350). The exemption is completely phased out after these ranges.
- Flexible spending accounts limits increase to $3,050 in 2023, up from $2,850 in 2022. For those plans that allow carryover of unused amounts, the carryover limit increases to $610 in 2023, up from $570 in 2022.
In summary, the IRS released inflation adjustment amounts for tax year 2023 including changes to the gifting & estate and GST exemptions, kiddie tax thresholds, the standard deduction, and certain credits and deduction limits available to taxpayers. Given the inflationary environment, taxpayers should take advantage of these increases when they can.
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