As you doubtless know, The American Taxpayer Relief Act of 2012 has just recently been signed into law. It extends many of the 2001, 2003 and 2009 tax cuts, allows Social Security withholding to return to prior levels and increases income tax rates; while for taxpayers at higher levels of income, it limits deductions and exemptions. A brief summary of the Act is as follows:
1. Permanent extension of the Bush tax cuts for individuals with taxable income under $400,000 ($450,000 for joint filers). The top income tax rate for those individuals with taxable income in excess of these amounts will be 39.6 percent;
2. Restoration of the personal exemption and itemized deduction phaseouts, except that the income threshold for itemized deductions is now $250,000 ($300,000 for joint filers);
3. Permanent extension of the 15 percent rate on capital gains and qualified dividends for individuals with taxable income under the same levels as above. The maximum capital gain/qualified dividend rate for individuals with taxable income in excess of those thresholds is now 20 percent;
4. Permanent patch of the Alternative Minimum Tax (“AMT”) exemption;
5. Extension of certain credits and deductions that would have (or in some cases, already had) expired;
6. Expiration of the payroll tax holiday; and
7. Extension of the $5 million estate and gift tax exemption (as indexed for inflation) and an increase of the top tax rate on estates and gifts to 40 percent.
We are relieved to see that the estate and gift exemption will be $5.25 million for 2013 and that no changes were made to the continued use of certain techniques such as grantor trusts, family limited partnerships and grantor retained annuity trusts to manage estate and gift tax exposure. Yet, we continue to hear that Congress may yet entertain legislation that limits, or even eliminates, the availability of these planning tools as other issues associated with the fiscal cliff are considered.
If you have any desire to make use of the gift tax exemption but were unable to complete this planning prior to the end of 2012, we would encourage you to do so soon. If that planning would include the use of family limited partnerships, grantor trusts, grantor retained annuity trusts, or similar advanced techniques, we would encourage you to move forward before future legislation affects the availability of these techniques.