On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012. This act makes several tax provisions permanent and extends others.
- The $5 million “unified” estate, gift and GST exemption is permanent. The $5 million exemption amount from the federal estate, gift and generation-skipping transfer (GST) taxes is now permanent. If no action had been taken, the exemption amount would have reverted to $1 million for 2013 and beyond. The $5 million exemption amount can be used entirely during one’s lifetime, at death, or a combination of both. The exemption provides numerous planning opportunities for individuals to pass businesses, vacation properties and other assets to their families.
- Inflation adjustments to exemption. The $5 million exemption amount will be adjusted for inflation annually. The 2012 exemption amount had already been adjusted to $5.12 million, but this inflation protection would have been repealed if no action had been taken. Preliminary calculations indicate that the adjustment for 2013 will be to $5.25 million, although the IRS has not yet made an announcement on this point.
- Estate and gift rate raised. The maximum tax rate for transfers above the exemption amount has been permanently fixed at 40%, which is higher than the 35% rate effective in 2012 but lower than the 55% rate that would have come into effect if no action had been taken.
- Portability is permanent. The “portability” reform, which can have the effect of doubling the estate tax exemption amount for married couples, is now permanent. This reform also would have expired if no action had been taken.
- New annual exclusion amount. The IRS previously announced that the inflation-adjusted gift tax annual exclusion amount will be $14,000 per recipient in 2013, up from $13,000 in 2012.
- “Charitable rollover” extended. The charitable rollover has been extended through 2013. In effect, this advantageous charitable rule allows people age 70 ½ and older to make tax-free charitable transfers from their IRAs that count against their otherwise required minimum distributions.
- Open questions for planning. Several potential revenue-raising proposals were not adopted, although they still could be adopted in the future. The proposals include mandating a minimum ten-year term for grantor retained annuity trusts (GRATs), limiting the duration of the GST exemption to 90 years, limiting the benefits of grantor trusts, and reducing the availability of valuation discounts for entities.
- Summary of key numbers for current federal estate, gift and GST tax law:
- $5 million: permanent exemption amount from estate, gift and GST taxes
- $120,000: inflation adjustment for 2012, anticipated to be $250,000 for 2013
- 40%: maximum tax rate on transfers over the exemption amount
- $14,000: gift tax annual exclusion amount per recipient for 2013
- Income tax update. The maximum tax rate on earned income has been increased from 35% to 39.6% on income over $400,000 for individuals and $450,000 for married couples filing jointly. The rate on capital gains and dividends for individuals and families above those levels has been increased from 15% to 20%. The 2013 start date for the previously enacted 3.8% tax on certain investment income, including trusts and estates, can be seen as effectively raising that 20% rate to 23.8%.
Attorneys in Taft’s Private Client group are available to discuss planning opportunities afforded by the law with our clients and friends. We encourage you to contact us with any questions.