People pay plenty of different kinds of taxes. You file an income tax return every spring, pay sales taxes when you buy things, and pay property taxes if you own a home. These taxes apply to nearly everyone.

By contrast, not many people ever have to worry about paying estate and gift taxes. These taxes are currently structured to give people a relatively large exemption before they ever have to pay money out of pocket. However, because any tax that is due can be substantial, it's important to know how those taxes work -- and what the future might bring. Below, you'll find the latest on what's happening with estate and gift tax rates and exclusions in 2023.

2023 estate and gift tax lifetime exemption

The way the estate tax works is still relatively complicated. Technically, there are 12 brackets that go into the estate tax calculation, running from 18% to 40%. However, the way that lawmakers handle giving most people an exemption from the estate tax basically makes all those lower brackets moot. As a result, anyone who has a taxable estate above the lifetime exemption can expect to pay 40% in estate tax.

Keyboard with blue Tax button.

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The good news, though, is that those amounts are substantial and are rising. In 2023, the per-person lifetime exemption from estate and gift tax will rise to $12.92 million, up from $12.06 million. That means that someone with a taxable estate of $12 million won't pay anything in tax, while a taxable estate of $13 million would pay 40% tax on the $80,000 amount over the $12.92 million exemption, or $32,000 in estate tax.

Bear in mind that the reason  this is a lifetime exemption from estate and gift tax is that it's possible to take advantage of the exemption before your death if you make taxable gifts. However, if you've used up some of your exemption to avoid gift tax on lifetime gifts, then you'll have correspondingly less available to cover your estate at your death.

2023 annual gift tax exclusion

Fortunately, it's also fairly easy to avoid the gift tax. Every year, the IRS grants an annual gift tax exclusion that allows you to make up to a certain amount of gifts to people without incurring any gift tax. In 2023, that amount is rising to $17,000, up $1,000 from where it was in 2022.

Note that the gift tax exclusion applies to each gift recipient. So if you want to make gifts to five different people, you can give each of them $17,000 without having to pay any gift tax. That's different from how the lifetime exemption works, and it plays a key role in the estate planning strategies that wealthy families use.

How to handle gift and estate tax

Most taxpayers find the $12.92 million lifetime exemption amount more than adequate to avoid ever having to pay gift and estate tax. But if you have assets that exceed that amount, you might consider taking action to reduce or eliminate your potential tax liability.

The most obvious way to reduce the size of your estate during your lifetime is by making gifts that qualify for the annual exclusion. Depending on how many family members or other heirs you're looking to leave a legacy for, many taxpayers can transfer substantial amounts year after year without paying tax or using up any of their lifetime exemption amount.

In addition, gifts for certain specific purposes get even more preferential treatment. For instance, if you pay medical bills directly to the doctor, hospital, or other medical provider, an unlimited amount is allowed with no gift tax. Similarly, gifts of educational expenses like tuition and fees made directly to the school aren't subject to the annual limit.

Most importantly, though, is that it's essential to speak to your own tax and estate planning  professional to get advice tailored to your situation. For instance, even though this article goes through the federal rules for 2023, different states have their own rules. Even if you owe no federal estate tax, you might end up owing money to your state.

Don't let the IRS get you

The 2023 estate and gift tax exemption and exclusion amounts are the highest ever, protecting more people from having to deal with these federal taxes. But if your estate is larger -- or if you're in a state where lower limits apply -- don't wait to start taking action to cut your potential future tax.