On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 into law, addressing lingering concerns about the expiring Bush era tax rates, estate and gift tax rates, and many other tax related concerns. This bill impacts nearly every American citizen in some aspect of his or her life. Here is a summary of what it means for you and your estate.
What It Means for Income Earners
Current tax rates continue for individuals earning less than $400,000 and couples earning less than $450,000. For those individuals making more than $400,000, and families earning more than $450,000, federal income tax rates will rise to 39.6%, up from 35% in 2012. Taxes on capital gains and dividends will increase to 20%, up from 15% in 2012. Married couples earning more than $300,000 and individuals earning at least $250,000 will face a phase-out of the personal exemption. Payroll taxes will also rise in 2013 to 6.2%, up from 4.2% in 2012.
What It Means for Your Estate
For those interested in transmitting their wealth to beneficiaries, both after their death or by a gift during their lifetime, some rules remain the same and some rules change in 2013. The estate tax exemption will remain at $5.12 million per person, and will be indexed for inflation in the future. However, for those individuals who pass away with more than $5.12 million (or couples passing away with more than $10.24 million in their estate subject to tax) the top estate tax rate will increase to 40%, up from 35% in 2012. Portability of a spouse’s exemption is also extended, meaning that if one spouse passes away without using their full estate tax exemption, the second spouse to die gets to use other spouse’s unused exemption, potentially transferring more wealth tax free with the right estate planning.
As for the taxes on gifts to others, the lifetime gift tax exemption will remain at $5 million. However, the annual per donee exclusion (how much you can gift to one person during the year without the lifetime gift tax exemption being affected) rises to $14,000 per donee.
What It Means for Older and Disabled Americans
The bill establishes the Commission on Long-Term Care, which will “develop a plan for the establishment, implementation, and financing of a comprehensive, coordinated, and high-quality system that ensures the availability of long-term services and supports.” The commission will investigate the interaction between Medicare, Medicaid, and private long-term care insurance. The commission will try to make recommendation to address the growing long-term care problems facing our country and the budget problems from government spending on long-term care. The bill also extends Medicare programs for older Americans and specialized Medicare Advantage plans for those with special needs.
Automatic spending cuts slated to take effect immediately were delayed by two months until March 1, 2013, with the current spending levels to be paid equally by tax increases and later spending cuts. What happens on March 1, 2013 will be an ongoing issue in January and February of 2013.
Medicare physicians are happy with the “doc fix” portion of the bill because it prevents the scheduled 27% reimbursement cuts to Medicare physicians.
The deduction of state and local general sales taxes, the above-the-line deduction for qualified tuition, the research credit, and the credit for energy-efficient appliances are all extended. Federal unemployment benefits and some other related services are extended for a year. Also included was a one-year extension of many agricultural programs.
While this bill contains fixes for many lingering issues, it does not contain a solution for the debt ceiling debate. The United States reached its borrowing limit at the end of 2012, and the debt issuance suspension period will last through February 28, 2013, meaning that Congress will again be faced with the challenge of raising the debt ceiling.
Perhaps the most important concerns to watch, for those with estate planning concerns, are the deficit reduction discussions that will remain an issue through 2013. These discussions could impact retirement accounts, charitable giving arrangements, and certain types of trusts. Additionally, Medicare and Medicaid programs, as well as VA benefits for disabled and elderly veterans, could be affected.
If these changes or any others come about which affect you or your estate, please consult your professionals as soon as possible.
About the Author
Brian G. Quinn is an Attorney with the law firm of Quinn & Banton, L.L.P. in St. Louis, Missouri. If you are interested in learning more about protecting yourself, your family, or your business using legal strategies, please contact Brian at 636-394-7242 to schedule a consultation.