IRS increases tax credits for gifts, estates and capital gains

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The income thresholds that trigger some key taxes will change in 2023, the IRS has announced.

The agency makes the changes to account for inflation. The moves will primarily affect wealthy taxpayers, although some middle-class people are also likely to benefit.

Below you will find definitions of the three most important taxes affected and explanations of the changes in 2023.

What is gift tax?

IRS increases tax credits for gifts, estates and capital gainsDean Drobot / Shutterstock.com

Giving someone a certain amount of money or other property is considered a gift, whether you intended it or not. Such gifts are taxable. Here’s how the IRS defines gift tax:

“Gift tax applies to the gift of property of any kind. You make a gift when you give away property (including money) or the use or income from property without expecting anything in return of at least equal value. If you sell something below its full value, or give an interest-free or reduced-interest loan, you may be giving a gift.”

Normally, the person giving the “gift” is responsible for paying the tax. In 2022, the transfer of property to someone valued over $16,000 will be subject to gift tax.

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

Gifts to a Spouse Gifts to pay a person’s college or medical expenses Gifts to a political organization for their use

Gift tax allowance for 2023

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In 2023 you can give a little more without triggering the gift tax. The new limit is $17,000, up from $16,000 this year. Until you exceed this limit, you owe no taxes.

The limit applies “per gift recipient”. For example, you can give three gifts of $17,000 to three different people over the next year without triggering the tax.

What is inheritance tax?

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Inheritance tax is a tax levied on property transferred from you to another person after your death. Often vilified as the “death tax,” the estate tax is $12.06 million in 2022. That means very few people pay them.

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

Inheritance tax exemption for 2023

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The estate tax exemption will increase to $12.92 million in 2023 from $12.06 million in 2022. That means you don’t owe any taxes until your estate exceeds $12.92 million.

Even if you avoid paying the federal government, your heirs must watch out for tax collectors in the state where 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 you’re sitting on a mountain of capital assets. These are things that you own for either personal use or investment purposes. Among the many examples of investments are:

A house budget arrangement stocks and bonds

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

In general, you must hold a capital asset for more than one year before selling it to qualify for the long-term capital gains rate. This is only 15% for most people, although it is higher in some situations, particularly for those whose taxable income exceeds certain thresholds.

If you sell a fixed asset a year ago, you are left with a short-term capital gain and, depending on your income, usually pay significantly higher taxes.

Maximum capital gain rates for 2023

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In 2023, the income limits for the 0%, 15% and 20% capital gains rates will increase. That means you can make more money before the capital gains tax rate affects you.

The income thresholds for long-term capital gains installments will be as follows:

Individual filers

0% – taxable income up to $44,625 15% – taxable income from $44,626 to $492,300 20% – taxable income of $492,301 or greater

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 greater