We Dodged the Fiscal Cliff – How the New Tax Bill Affects You

In case you haven’t heard, the New Year brought a new law recently signed by the President. To avoid the country from falling off the “fiscal cliff,” the “American Taxpayer Relief Act” was approved on New Year’s Day. The approval and signing of this new law may affect the future of your estate plan and your estate taxes.

Regarding federal estate taxes, this new law makes almost all of the previous tax provisions, commonly known as ”TRA 2010,” permanent, with the exception of the tax rate. This means there is an estate tax exclusion of $5 million that will be adjusted for inflation. So for 2013, the exclusion is $5.25 million. The permanent provisions are combined with the gift tax and can be used either after death or while the person is still alive. The tax rate is now capped at 40% instead of the prior 35%.

The “portability” provision from TRA 2010 is also retained. This means that the estate tax exclusion amount of the first spouse to die may be used by their surviving spouse, assuming an estate tax return is filed for the pre-deceasing spouse.

Regarding state estate taxes, as with the prior law, they remain deductible rather than a credit (as was the case many years ago).

The Generation Skipping Tax (GST) exemption is set at $5 million and is also adjusted for inflation. As in the prior law, the GST exemption is not portable. There are, however, special trusts that can preserve the GST exemption of the first spouse to die.

The new law affects everyone’s income taxes. The existing rates on incomes below $400,000 (single) and $450,000 (married, filing joint) have been set permanently to the current level. For incomes over that amount, the rate will increase from 35% to 39.6%, where it was before 2001. In addition, this income bracket will see a raise in qualified dividend and capital gain income tax rates from 15% to 20%. Those tax rates will not change for lower income amounts.

When it comes to “charitable rollover” IRAs, those provisions will be extended for 2012 and 2013 only. This means that an individual over age 70 ½ can give up to $100,000 from their IRA without taking that amount into income. If you are planning to make or have made charitable contributions from your IRA, this is good to know because the deduction for a normal contribution, without the benefit of a “charitable rollover,” may be capped or not offset the income.

On the spending side, what are commonly known as “sequestration cuts,” which were to start on January 1, have now been delayed for two months. All of these issues will have to be addressed again. So what is slated as “permanent” under this Act may not end up being as permanent as we have been told.

Where does that leave us today? Before you change your existing estate plan, create a new plan or gift to someone, it is important to consult with an experienced estate planning attorney and tax professional who is familiar with these changes and who can show you what will be in your best interest, legally and financially. They will make recommendations about any changes you may need to make to your estate plan now and advise you on what may need to be changed or updated in the future.