US Tax Inflation Adjustments for 2023 – Impact on the International Family

Certain provisions in the United States Internal Revenue Code (Code) are tied to inflation to prevent rising prices from resulting in higher taxes. Annual inflation adjustments have been part of the tax rules for well over 2 decades. These formulas set by Congress help prevent inflation from nudging taxpayers into higher tax brackets and increasing tax rates even though the taxpayer’s real income has not changed.

The Internal Revenue Service (IRS) makes adjustments for inflation every year, which cover numerous items such as tax brackets, standard deduction amounts, retirement contribution limits and more.  With the surge in inflation, there have been some interesting “larger-than-average” adjustments for 2023.  All of them can be accessed in Revenue Procedure 2022-38  released by the IRS on Tuesday October 18, which provides full details about the annual adjustments.

Today’s blog post focuses on the adjustments relevant to US taxpayers abroad, those married to a foreign spouse and generally, those impacting the international family.  In a nutshell, I set out below the inflation-adjusted biggies as relevant to the international tax arena.

The International Tax Maze – I Know My Way Around

I work exclusively on international tax matters.  Having lived abroad for over 35 years and married to a “foreigner”, I know how complicated life can get from a US tax perspective.  I am happy to help you navigate the US tax maze and reduce your tax burden with careful and appropriate tax planning.  Now, let’s look at the inflation-adjusted Code provisions and what it all means for the international family.

The numerical designations are those set forth in the IRS Revenue Procedure; this is followed by the topic and relevant Code section and the IRS verbatim description of the adjustment.  I flesh things out a bit more and provide further information with hyperlinks to my blog posts.

Inflation Adjustments for 2023 Impacting the International Family

.37 Expatriation to Avoid Tax IRC S. 877

For calendar year 2023, under § 877A(g)(1)(A), unless an exception under § 877A(g)(1)(B) applies, an individual is a covered expatriate if the individual’s “average annual net income tax” under § 877(a)(2)(A) for the five taxable years ending before the expatriation date is more than $190,000.

If you want to learn more about expatriation see my tax blog category here – full of the latest information and planning ideas.

.38 Tax Responsibilities of Expatriation IRC S. 877A

For taxable years beginning in 2023, the amount that would be includible in the gross income of a covered expatriate by reason of § 877A(a)(1) is reduced (but not below zero) by $821,000 pursuant to § 877A(a)(3).

Essentially this is an exclusion amount for deemed gain on the covered expatriate’s “pretend” sale of worldwide assets. It can reduce or eliminate any “ exit tax” that is owed, but the exclusion amount must be allocated among the various assets deemed to be sold.  The rules provide for the possibility to defer payment of the exit tax. You can read all about it at my blog post here.

.39 Foreign Earned Income Exclusion IRC S. 911

For taxable years beginning in 2023, the foreign earned income exclusion amount under § 911(b)(2)(D)(i) is $120,000.

Everything you need to know on this topic can be found in my blog post category covering the foreign earned income and housing exclusions, how to qualify and what to do to keep these benefits intact.  If you are a green card holder, you need to be extra careful since claiming the exclusions could possibly jeopardize your green card for immigration law purposes.  My blog post covers this issue.

.41 Unified Credit Against Estate Tax IRC S. 2010

For an estate of any decedent dying in calendar year 2023, the basic exclusion amount is $12,920,000 for determining the amount of the unified credit against estate tax under § 2010.

Gift and Estate taxes are inextricably linked.  The basic exclusion amount is the same for both taxes, but with respect to foreign individuals there are many nuances and special rules. Check out my blog post category covering US Gift and Estate taxes. Read more about the US Estate and Gift taxes that may be assessed on non-US persons in my earlier blog posts here and here. 

.43 Annual Exclusion for Gifts IRC S. 2503; 2523

(1) For calendar year 2023, the first $17,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts under § 2503 made during that year.

(2) For calendar year 2023, the first $175,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts under §§ 2503 and 2523(i)(2) made during that year.

Marriage to a foreign individual will complicate your tax life in so many unexpected ways, especially when gifts are made or property is owned jointly. My blog post here gives you a taste.

.47 Notice of Large Gifts Received from Foreign Persons IRC S. 6039F

Notice of Large Gifts Received from Foreign Persons. For taxable years beginning in 2023, § 6039F authorizes the Secretary of the Treasury or her delegate to require recipients of gifts from certain foreign persons to report these gifts if the aggregate value of gifts received in the taxable year exceeds $18,567.

Gifts from foreign individuals must be reported if the aggregate annual gifts exceed US$100,000. Note, the duty to report foreign gifts does not mean such gifts are taxed. “Gifts” from foreign corporations or partnerships received in the year must be reported at the lower threshold level $18,567.  These are so-called “purported” gifts and carry a big tax bite.  Details here and here.

Want to learn more about gifts and bequests from foreign persons, check my blog post here – spoiler alert, it’s complicated.

Posted October 20, 2022

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