President Barack Obama signed into law the American Taxpayer Relief Act which preserved many of the key tax provisions passed during the George W. Bush administration. This avoided what had come to be known as part of the “fiscal cliff.” An analysis of clients objectives for income, estate and gift tax purposes should be undertaken in light of the new law. The attorneys at Fowler White Burnett can meet with our clients to review their estate plans both from a tax and succession planning point of view.
Highlights of the legislation are as follows:
Estate, GST, and Gift Tax
The $5 million indexed estate, gift and GST exemption is retained (the 2013 exemption is expected to be $5,250,000 for individuals and 10,500,000 for married couples). The top estate, gift and GST rate however, is increased from 35% to 40% for gifts made and decedent’s dying after 2012. The “portability” election has been made permanent. This election allows the executor of a deceased individual’s estate to transfer any of a decedent’s unused estate tax unified credit amount to the individual’s surviving spouse.
Income Tax Rates
The top income tax bracket is increased to 39.6% for the portion of taxable income exceeding $450,000 for joint filers and $400,000 for single filers.
Personal Exemptions and Itemized Deductions
The phase-out of personal exemptions and itemized deductions is reinstated for individuals with gross income in excess of new indexed threshold amounts. The phase-outs provisions start with a threshold of $300,000 for joint filers and for $250,000 for single filers. The amount of the exemption is reduced under the phase-out by 2% for every $2,500 by which the taxpayer’s adjusted gross income exceeds the applicable threshold. The total amount of the applicable taxpayer’s itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount. The reduction may not, however, exceed 80% of the otherwise allowable itemized deductions.
Long-term Capital Gains and Dividends
The top rate for qualified dividends and long-term capital gains is raised to 20% (up from 15%) for taxpayers with incomes exceeding 450,000 for joint filers and $400,000 for single filers.
Alternate Minimum Tax (AMT)
The AMT is the excess, if any, of the tentative maximum tax for the year over the regular tax for the year. Permanent AMT relief is enacted by providing revised exemption amounts retroactively for 2012 and a greater exemption amount for 2013 that indexed for inflation. The exemption amount is increased to $80,800 for joint filers and $51,900 for single filers. In addition, it indexes these exemption amounts for inflation. The Act also permanently extends provisions that allowed nonrefundable personal income tax credits to be used to offset AMT liability.
Charitable IRA Distributions
Tax-free distributions from individual retirement plans to a charity is retroactively revived for 2012 and continued through 2013. Special transitions rules permit distributions taken in 2012 to be transferred to charities for a limited period in 2013. Another special rule permits certain distributions made in 2013 as being deemed made on Dec. 31, 2012.