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Highlights of “The American Taxpayer Relief Act of 2012”

by Phil Levin, Esq. on January 3rd, 2013

As we begin the New Year, we want to recap for you the most relevant tax law changes, which Bill passed in the late hours on January 1, and was signed into law by President Barack Obama on January 3, 2013.

On New Year’s Day, Congress approved the first permanent set of estate, gift, and generation-skipping transfer (GST) tax rates and exemptions in twelve (12) years. Despite speculation and attempts over several years focused on options ranging from total repeal to a return to pre-2001 law, the law now made permanent by Congress and the President is identical to 2012 law, as detailed below, except that the compromise top marginal transfer tax rate will become 40 percent rather than 35 percent.

The Senate approved this legislation in a bipartisan 89-8 vote a few hours after 2013 had begun. The House of Representatives approved it an hour before midnight in a much less bipartisan 257-167 vote, with twice as many Democrats as Republicans supporting it, and the President signed the legislation into law on January 3, 2013, enacting a budget deal which averted income tax increases for most Americans.

Forty Percent Rate

The new 40 percent top tax rate is up from the 35 percent rate of 2010 through 2012, but less than the 45 percent rate of 2009 law that had been the position of the Obama Administration. Indeed, 40 percent is the precise midpoint of those two positions, which had marked the boundaries of the debate.

Unified Exemption

The exemption remains at $5 million, indexed for inflation since 2011, which places it at $5.25 million for gifts made by individuals during life and for the estates of decedents dying in 2013. In addition to the lifetime exemption, individuals can also gift $14,000 per person in 2013, known as the annual gift tax exclusion, and which does not impact the lifetime gifting exemption.

With unified estate and gifts tax exemptions maintained at their 2011 and 2012 levels, we now know that the rush to make large gifts at the end of 2012 may not have been necessary. But there was no way to know that until a few hours after it was too late, when Congress finally acted. And if the timing of some of the gifts was dictated by the January 1 “sunset” that was on the books when 2012 ended, our sense is that those year-end gifts provided younger generations with access to family wealth, either outright or in trust, effectively removing any future appreciation in transferred assets from the reach of gift and estate taxes. Of course, Congress can make future changes to the estate tax law, and while permanence at last is a welcome relief, we know that it lasts only until Congress chooses to make more changes.

Portability

The December 2010 legislation introduced the “portability” of the exemption for gift and estate tax purposes, whereby the exemption not used by the first spouse to die would be available for use by the surviving spouse for gift tax purposes and the surviving spouse’s executor for estate tax purposes (but not for GST tax purposes). While, Treasury Regulations published in June 2012 provided considerable clarity and welcome guidance regarding portability, Congress and the President have now made portability permanent.

Other Tax Law Measures

Although estate and gift taxes are the principal focus of our analysis, because of their obvious importance to estate planning, it is well known that the New Year’s Day legislation was a part of a broad rescue from a “fiscal cliff” by modifying and making permanent the “Bush tax cuts”.

Significant tax legislation signed into law by President Obama on January 3 include:

  • For most individuals, the law permanently extends the lower federal income tax rates that have existed for the last decade. That means most clients will continue to pay tax according to the same six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2012.
  •  Reinstatement of the 39.6 percent individual income tax rate and 20 percent capital gains tax rate for taxable income over $450,000 for joint filers and $400,000 for single individuals;
  •  Return of the phaseout of personal exemptions and itemized deductions, but with higher thresholds for itemized deductions;
  •  Restoration of the IRA charitable rollover for 2012 and 2013 for individuals over 70½, with special rules for IRA distributions made in December 2012 and for charitable rollovers made in January 2013; and
  •  Indexing the individual alternative minimum tax (AMT) exemption for inflation, in effect making the annual AMT “patch” permanent.

We will continue to closely monitor and advise you of any new and significant changes which impact your clients.

As always, we look forward to working with you in the New Year and welcome your questions.

Please feel free to call The Levin Law Firm at (610) 977-2443 to discuss particular client situations and to schedule an appointment for your clients who need to establish and update their estate plans.

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