The IRS is adding 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 announced.

The agency makes changes taking into account inflation. These moves will mostly affect wealthy taxpayers, although some middle-class people are also likely to benefit.

Below are definitions of the three main taxes that are affected and explanations of what will be new in 2023.

What is gift tax?

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When you give someone some money or other property, it’s considered a gift, whether you intended it that way or not. Such gifts are taxable. Here’s how the IRS defines gift tax:

“Gift tax refers to the transfer of any kind of property as a gift. You make a gift if you give property (including money), or use or receive income from property, without expecting to receive something of at least equal value in return. If you sell something for less than its full value, or give a loan at no or reduced interest, you may be making a gift.”

As a rule, the giver of the “gift” is responsible for paying the tax. In 2022, giving property worth more than $16,000 to someone else is subject to gift tax.

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

  • Gifts for husband
  • Gifts that pay for someone’s tuition or medical expenses
  • Gifts to a political organization intended for its use

Exemption from gift tax in 2023

cash gift
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In 2023, you’ll 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. As long as you don’t exceed that limit, you don’t owe any tax.

Limit applies “per performer”. So, for example, next year you could give three gifts of $17,000 to three separate people and not pay the tax.

What is property tax?

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Estate tax is levied on property that is transferred from you to someone else after you die. Often disparaged as the “death tax,” the federal estate tax in 2022 is $12.06 million. That means very few pay it.

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

Exemption from property tax in 2023

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The property tax exclusion will increase to $12.92 million in 2023 from $12.06 million in 2022. That means that as long as your estate does not exceed $12.92 million, you will not owe any taxes.

Even if you avoid paying the federal government, your heirs should be on the lookout 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 you own either for personal use or for investment purposes. Among the many examples of capital assets are:

  • House
  • Household furniture
  • Stocks and bonds

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

In general, you must own the capital asset for more than a year before selling it to qualify for the long-term capital gains rate. This is just 15% for most people, although it is higher in some situations, especially for those whose taxable incomes exceed certain thresholds.

If you sell a capital asset for up to a year, you’re stuck with a short-term capital gain and usually pay much higher taxes depending on your income.

2023 capital gains maximum rates

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In 2023, the income thresholds for capital gains increase to 0%, 15% and 20%. That means you’ll be able to earn more money before the capital gains tax rate hits you.

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

Single files

  • 0% — taxable income up to $44,625
  • 15% — taxable income between $44,626 and $492,300
  • 20% – Taxable income of $492,301 or more

Married filing jointly

  • 0% — taxable income up to $89,250
  • 15% — taxable income between $89,251 and $553,850
  • 20% – Taxable income of $553,851 or more

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