By Erica R. Haft, LL.M and William G. Smith, LL.M
The largest annual inflation-based increase to the estate and gift tax exclusion amount (also known as the “Basic Exclusion Amount”) in United States history will become effective on January 1, 2023. The Basic Exclusion Amount will increase by $860,000 from the current amount of $12,060,000. This means that starting January 1, 2023, an individual can pass $12,920,000 ($25,840,000 for a married couple) at death or during life tax-free.
Why the large increase? High inflation plus the Tax Cuts and Jobs Act (TCJA).
Enacted in December 2017, the TCJA increased the Basic Exclusion Amount to $11,180,000, and it is adjusted annually for inflation. The annual increases are not set to last forever under existing law. Beginning on January 1, 2026, the Basic Exclusion Amount will be reduced to the pre-2018 level of $5,000,000, as adjusted for inflation.
To understand why this upcoming year’s increase is gaining attention, we can look at the previous years’ annual adjustments for context.