4 Ways Inflation Can Help Clients Cut Taxes in 2023

3. Standard deductions shelter more income.

The new standard deductions are:

Single: $13,850, up from $12,950 in 2022
Married filing jointly: $27,700, up from $25,900
Married filing separately: $13,850, up from $12,950
Head of household: $20,800, up from $19,400

Extra Standard Deduction for Age 65 or Blind

Married filing jointly: $1,500
Single or head of household: $1,850

Thanks to inflation increases, for 2023 a married couple filing jointly (if each spouse is 65 or older) can now enjoy a standard deduction topping $30,000 for the first time ever. The actual amount is $30,700. They receive the basic standard deduction of $27,700, plus each spouse receives an additional standard deduction of $1,500 for being 65 or older ($27,700 + $1,500 + $1,500 = $30,700).

More income can be sheltered this year for more clients. These larger amounts will mean that even more clients will be taking the standard deduction this year (and not itemizing their deductions).

4. The estate and gift tax exemption just got much bigger — for now.

For 2023, the lifetime exemption for estate, gift and generation-skipping transfer tax is $12.92 million per individual. That’s up from $12.06 million in 2023. The annual gift tax exclusion is $17,000, up from $16,000 in 2022.

Like with the income tax brackets, these inflation increases are the largest ever. Because the estate exemption is so large to begin with, the inflation increase is exponentially larger. The exemption amount increases by $860,000. For a married couple, the 2023 exemption doubles to $25,840,000.

But this party probably won’t last for long. After 2025, these amounts are scheduled to be cut to half their current value.

Even for clients who don’t die before 2025, these exemption amounts can be accessed earlier through lifetime gifting.

In addition, the IRS has ruled that if the larger exemption is used now and the client dies after 2025 when the exemption is cut in half, there will be no clawback. In effect, even the IRS is saying use it now or lose it later. That can be done with lifetime gifting.

Some clients may think that estate tax exposure is not an issue because the value of their estate is nowhere near $12 or $25 million. Things can change, though. The exemption will likely go down and assets will hopefully go up.

Gifting is relatively easy but is for cash gifts only. It is not for appreciated property like stocks that can receive a step-up in basis after death, eliminating the tax on lifetime appreciation. Highly appreciated property should generally be held until death to gain that big tax benefit.

Remember to first make sure that clients are financially able to make gifts, without having to worry about needing those funds later. Gifting now can reduce estates that later could be subject to heavy estate taxes. Help clients capitalize on tax-free gifting opportunities before they are no longer available.

As you can see, there’s plenty to talk about for the new year and lots of opportunities to add value. So, ring in 2023 by bringing these planning ideas to your clients now!

For more 2023 planning tips from Ed Slott, check out Why Advisors Should Rethink the ‘M’ in RMD.

(Photo: Natalie Brasington)

Ed Slott, CPA, America’s IRA expert, is a nationally recognized speaker, television personality and author known for turning advanced tax strategies into understandable, actionable and entertaining advice. He was named “The Best Source for IRA Advice” by The Wall Street Journal.

Slott is a professor of practice at The American College of Financial Services and has been recognized by leading industry organizations for his significant thought leadership and contributions. He is one of the top pledge drivers of all time with his popular public television specials and the creator of Ed Slott’s Elite IRA Advisor Group.

He most recently published the updated book, “The New Retirement Savings Time Bomb: How to Take Financial Control, Avoid Unnecessary Taxes and Combat the Latest Threats to Your Retirement Savings” (Penguin Random House, 2021).