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The estate tax exemption increase for 2023

On Behalf of | Oct 18, 2023 | Estate Planning

For 2023, Americans in Pennsylvania and other states have received an increased federal estate tax exemption. The federal government adjusts the amount yearly to compensate for inflation, which can significantly affect Americans with a large estate to leave to their heirs. The following summary covers the amount of the increase and its implications.

2023 estate tax exemption

In 2022, the federal estate tax gave individuals an exemption of $12.06 million. For 2023, that amount has increased to $12.92 million, which creates a need for some families to revisit their estate planning. Married couples can exempt a combined $25.84 million, and those with estates valued under these amounts do not need to pay taxes.

The estate tax rate

An exceedingly small percentage of Americans have estates worth $12.92 million or more. However, for those with wealth exceeding this amount, the federal taxes they must pay can be significant. For example, for people with estates over the estate tax exemption threshold, the first $1 million is taxed at rates ranging from 18% to 39%. They must pay a flat rate of 40% tax on the remainder of their estate.

Estate taxes underwent an overhaul in 1976 and have seen many incremental increases since, typically for inflation. The government instituted a significant increase in 2018, jumping from $5.49 million in 2017 to $11.18 million in 2018. The tax rate is due to reset in 2025 to $5.49 million, adjusted for inflation, unless Congress makes the change permanent.

State estate taxes

Although many estates can take advantage of the federal tax exemption, they may not have the same situation at the state level. Twelve states, plus the District of Columbia, levy estate taxes. The exemption threshold for states is lower than the federal amount.

Additionally, six states have an inheritance tax, ranging from 1% to 18%, depending on the state and the deceased’s relationship with the individual. Your heirs pay this tax directly, potentially reducing the remaining inheritance passed to your children and grandchildren.

The increased estate tax exemption for 2023 has significant implications for those with substantial estates. It’s critical for high-net-worth families to stay informed about tax changes to manage their tax obligations effectively.