Tax Law Changes for 2023

As we start the New Year, we want to take a moment to inform you of tax law changes which will take effect this year. Some may affect your estate and retirement planning. While there haven’t been major changes at the Colorado state level, there have been changes to the federal tax code worth noting.

401(k) Contribution Changes

On October 21, 2022, the Internal Revenue Service (IRS) announced an increase in the amount individuals can contribute to their 401(k) plans, from $20,500 in 2022 to $22,500 in 2023. In addition, the catch-up contribution limit for employees who are age fifty or older will increase from $6,500 in 2022 to $7,500 in 2023. The limits on contributions to traditional and Roth individual retirement accounts (IRAs) will increase from $6,000 in 2022 to $6,500 in 2023, with individuals age fifty or over permitted to contribute an additional catch-up contribution of $1,000 (unchanged from 2022). While this change not only provides a means to invest more aggressively for your retirement, funds remaining upon your death will be part of legacy planning for your beneficiaries.

Gift Tax Exclusion Changes

Additionally, the IRS increased the annual gift tax exclusion to $17,000 per recipient. This annual gift allows individuals to gift without using their individual taxpayer’s lifetime gift and estate tax exemption. While the lifetime gift and estate tax exemption is increasing in 2023 to $12.92 million per individual, we anticipate this threshold will be reduced at the end of 2025. We are conservatively anticipating that this amount will be cut in half at the start of 2026.

Prepare for Upcoming Tax Law Changes

With this looming threshold reduction change in mind, many families are taking advantage of gifting while the exemption remains high. For example, a married couple with three children could transfer $34,000 to each child ($102,000 total) without paying gift taxes and without using up any of their combined $25.84 million gift tax exemption. You are always allowed to gift more than $17,000 per year to an individual, but that gift must be reported to the IRS through a gift tax return (709 form).

Spousal Gifting

The laws regarding gifting to US citizen spouses haven’t changed. Spouses who are both US citizens may transfer unlimited amounts to each other without incurring any gift tax. Any assets in excess of the couple’s combined estate tax exemption ($25.84 million in 2023) will be taxed at the death of the surviving spouse; transferring assets to the survivor only serves to defer the tax the IRS will eventually collect. Gifts to a non-US citizen spouse, however, are limited. When the recipient spouse is not a US citizen, whether they are a US resident or not, any funds above $175,000 are considered taxable gifts.

Start the New Year Off Right!

Take this time to review your tax planning and your gift planning with your advisors. Having a solid team comprised of a CPA, financial advisor, and estate planning attorney will not only set you up for success, but the next generation as well.

If you need assistance creating your own team of advisors, please feel free to contact us. We are happy to connect you to trustworthy professionals in our planning community. We wish you a very happy and prosperous 2023!