The IRS adjusts various tax exemptions and thresholds each year to ensure that they keep up with inflation. For example, expats should note that the Foreign Earned Income Exclusion limit has risen to £112,000 in 2022 (so for filing in 2023), and will rise to £120,000 in 2023 for filing in 2024.
They have also adjusted the gift tax annual exclusion and the lifetime exemption/estate tax exemption, and there are several ways to make use of the new higher thresholds, according to Dunhill Financial.
The annual gift tax exclusion per donee has been raised to $17,000 per person for 2023, the company writes. That’s up from $16,000 for 2022 and $15,000 for the years 2018 to 2021.
The lifetime gift tax and estate tax exemption, meanwhile, has increased to $12.92 million for 2023. That’s up from $12.06 million for 2022 and $11.7 million for 2021.
If Congress doesn’t take action however, in 2026 the lifetime exemption will revert to 2011’s original $5 million (adjusted for inflation). This is because it was raised in 2017 with a ‘sunset clause’ in 2025.
So for anyone who dies in 2023, their estate won’t be taxed if its total value is less than $12.92 million.
With the possible lower rate coming in just a couple of years' time, even if your total assets (including property) are worth less than this amount, it may be advantageous to think about gifting over the next couple of years, potentially into trust or company structures, to avoid possible future taxes.
In the meantime, several planning strategies are available to take advantage of the higher thresholds.“A benefit to using the exemption during lifetime is that any appreciation of the asset given away is also outside of the individual’s estate for estate tax purposes at death,” whether the gift is made either to an individual or to a trust, according to Dunhill Financial.
Expats can also tap the spousal lifetime access trust, popular for married couples because grantors can keep an indirect benefit from the irrevocable trust, allowing for distributions from the trust to provide income for the couple, the company says. Moreover, in such trusts the grantor pays taxes personally on behalf of the trust, which lets the trust grow without incurring the income tax.
Other expats may be better served by a descendants trust, in which the grantor’s spouse isn’t a beneficiary, the company says. Such trusts can be set up to either have the grantor or the trust responsible for the income tax and are “very flexible” overall because they allow the grantor to designate the assets according to their wishes.
Expats could take advantage of the higher exemption by tapping life insurance for offsetting state or federal estate taxes that could be due upon their death, including through the use of irrevocable life insurance trusts and second-to-die policies.
If you need assistance with your long term financial planning including estate tax planning, don’t hesitate to get in touch.
If you have any questions, don't hesitate to contact us.
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