Talks of the Department of Internal Revenue Services and tax season can bring shivers down the spine in anticipation of the need to collect tax-related documents for your accountant (or wrangle on your own with an online tax filing system).
However, October 2022 ushered in an opportunity to start planning for any changes to the tax codes and exemptions in the new year. While these changes won’t impact your current year taxes, it offers a chance to consider your investment strategy in the year ahead.
According to Bryan Koepp, Regions Wealth Planning executive, this year’s changes may also create a sense of stability, at least for the coming three years.
“We will likely have a three-year window of tax rules that are reasonably certain,” said Koepp. “As a result of the mid-term elections, divided government could both reduce market volatility and the likelihood of significant tax legislation.”
Changes in 2023 at a glance
For the 2023 tax year, the standard deduction increases to:
- $13,850 for single filers (an increase of $900)
- $20,800 for head of household filers (an increase of $1,400)
- $27,700 for married couples filing jointly (an increase of $1,800)
The IRS also increased a number of exclusions and specialty circumstances, which could create a notable tax opportunity for those who fall into certain categories.
- The annual exclusion for gifts increases from $16,000 to $17,000 for individuals and from $32,000 to $34,000 for married couples.
- The foreign earned income exclusion increases from $112,000 to $120,000.
- The maximum tax credit for qualified adoption expenses increases from $14,890 to $15,950.
- The basic estate tax exclusion for inheritances increases from $12,060,000 to $12,920,000 per person (an astounding $860,000).
“Clients should begin thinking about what they may want to accomplish financially,” said Koepp. “On the estate side, the annual gifting exclusion increase to $17,000 in 2023 provides additional gifting opportunities for smaller gifts that can be made for life’s needs today. Anything from the purchase of a car for a child, expenses to pay or subsidize an internship for a college graduate, or the beginning of an investment account for a child.” That can be an important step for the road ahead and potential for helping build a financial future.
The increase in the lifetime gift and estate exemption of $860,000 is also significant, Koepp says. “That $12.92 million lifetime gift exemption, up $860,000 from 2022, will become an even more significant part of the narrative with our high-net worth clients,” said Koepp. “We expect to engage in more conversations around generational legacy planning, which often involves the transition of businesses, movement of other assets such as real estate and investment to hedge the impact of future tax legislation – likely after the next presidential election or post-2025 sunset – and allow for the next generation to enjoy such assets in the future while removing them from the current generation’s taxable estate.”
The Rise of Generation X
Often overlooked by the headlines which focused on Baby Boomers and Millennials around every corner, Generation X has quietly amassed almost 30 percent (or $37.53 trillion as of mid-2021) of the wealth in the United States.
According to recent Fed data, Generation X saw the largest leap in wealth since the pandemic began. Baby Boomers continue to hold the majority of the country’s wealth, at just over 50 percent, but over the next few decades, will be part of the great wealth transfer with Generation X and Millennials as the primary beneficiaries.
“Generation X has begun to evolve into the role many Baby Boomers have had for the past decades. They are now the sandwich generation,” noted Koepp. “They are in many situations taking care of their parents and children while at or approaching their larger income earning years. In turn, they have also begun to inherit in greater frequency from inheritance and gifts. Generation X’s thumbprint for both wealth creation and receipt will create new rules of engagement from which the Millennials and future generations will build from.”
Planning Makes Perfect
“We consider ourselves to be in the Golden Age of Estate Planning right now,” said Koepp. “The non-adoption of tax reform last year has provided a continuation of rules that are favorable for impactful, generational legacy planning.”
Keep in mind that the golden age is finite. So, no matter what generation you belong to, Koepp says the current federal gift and estate tax rules are scheduled to sunset at the end of 2025 to pre-Tax Cuts and Jobs Act levels of 2017.
“Wealth planning with a strategic focus over the next three years will likely be more methodical, deliberate and thoughtful versus rushed,” explained Koepp. “That being said, you don’t want to procrastinate either. A major purpose of planning is to prepare for scenarios and take advantage of new opportunities which may prove pivotal in strengthening your financial position during the ongoing generational wealth transfer. Testing financial goals and aspirations with financial science provides the best forecasting possible in strategy selection.”
