The Applicable Exclusion Amount refers to the specific dollar amount that an individual can transfer to others without incurring federal gift or estate taxes. This amount is crucial in the context of estate planning, as it allows individuals to minimize tax liability on their wealth during their lifetime and after death.
Under the current federal estate tax law, the Applicable Exclusion Amount is adjusted annually for inflation. As of 2023, the exclusion amount is $12.92 million per individual. This means that an individual can transfer up to this amount in gifts during their lifetime or pass it on at death, exempt from federal gift and estate taxes. For married couples, the exclusion can effectively be doubled, allowing a combined exclusion of over $25 million if both spouses take advantage of this provision.
For example, if an individual has an estate valued at $15 million and passes away in 2023, they can use the Applicable Exclusion Amount to shield $12.92 million from estate taxes. The remaining $2.08 million would be subject to federal estate tax. It is essential for individuals to plan accordingly, as any amount exceeding the Applicable Exclusion Amount may be taxed at a rate of up to 40%.
In Texas, there are no state estate or inheritance taxes, making the federal Applicable Exclusion Amount particularly significant for residents in this area. Understanding this concept is vital for effective estate planning, ensuring that individuals can maximize the benefits of their estate while minimizing tax liabilities.
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