US Tax Inflation Increases Exemption Amounts And Opportunities – Income Tax
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The Internal Revenue Service (IRS) recently presented its inflation adjustments for the US federal tax year 2023. Thresholds for several key tax rules are rising significantly, which is not surprising given the rapid growth in consumer prices and other relevant inflation measures. In general, for high-net-worth households of U.S. citizens or residents, the 2023 adjustment represents an increase of almost $1 million in the amount of money that a person can make before U.S. federal tax on estate, gift, and generational transfers ( taken together), “transfer tax”); Specifically, the lifetime transfer tax exemption will increase to $12.92 million for 2023 from $12.06 million in 2022. however, this exemption is scheduled to fall back to half that amount (ie, inflation-indexed US$5 million) beginning January 1, 2026. We see many customers remaining motivated to explore and implement ways to efficiently use this increased allowance ahead of the planned reversal date. This motivation has increased as markets have depressed values and rates are rising.
Non-US citizens who are not domiciled in the United States may be subject to US federal estate taxes only on assets in the US location that are held or deemed possessed at the time of death. For these individuals, however, the lifetime exemption from US federal estate tax remains a mere $60,000. Our recommendation is usually to encourage these non-US clients to shield themselves against this US federal estate tax liability by investing indirectly through blocker companies or alternatively through estate tax remote trusts if the goal is to keep assets up to to hold to her death; For those surviving and planning exits over the course of the investment, US federal income tax optimization on exit remains the priority, and US federal estate tax optimization is secondary at best.
For an individual considering renunciation of U.S. citizenship, (i) the average annual net income tax liability limit under the 5-year income tax test has increased to $190,000, and (ii) the amount of earnings to be excluded from gross income if he or she is a covered expatriate subject to the assumed sale rule has increased to $821,000.
In addition, individuals should be pleased that the annual gift exclusion will be $17,000 in 2023, up from $16,000 in the 2022 tax year. While spouses of US citizens continue to enjoy an unlimited spousal deduction for gifts, the annual gift tax exemption for gifts to non-US spouses remains limited to a nominal amount of US$100,000 indexed annually for inflation (in addition to lifetime). transfer tax exemption amount that could potentially also be used to make gifts to a non-US spouse). In 2023, that means the first $175,000 gifts to your non-US spouse are essentially exempt from US gift taxes. As a reminder, these gifts must be of “current interest” (generally meaning direct gifts, not fiduciary gifts) to qualify for the annual exclusion amount.
Another inflation-adjusted amount typically of interest to American citizens working abroad is the foreign-earned income exclusion, which has been increased to $190,000.
The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.
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