Now that most of the hand wringing and finger pointing in Washington D.C. over the fiscal cliff has subsided, you need to look at how the American Taxpayer Relief Act of 2012 (ATRA) will affect you. If ATRA had not passed, many people would be scrambling to sort out their estate planning issues. However, now that it has become law, ATRA provisions should have a minimal impact on estate planning needs for a majority of us in the so-called middle class. In this article, I want to look at what I consider to be some of the more important provisions of ATRA.
Individual Income Tax Rates: ATRA makes “permanent” for 2013 and beyond the lower “Bush-Era” income tax rates for all Americans, except individual taxpayers with taxable income above $400,000.00, married taxpayers with an income over $450,000.00 and heads of households with income over $425,000.00. If you are above these levels, income will be taxed at a 39.6% rate.
Capital Gains Rates: ATRA raises the top rate for capital gains and dividends to 20% based on the income levels referenced in the prior paragraph. This 20% is up from the Bush-Era maximum rate of 15%.
Alternative Minimum Tax (AMT) Relief: ATRA “patches” the AMT for 2012 and subsequent years by increasing exemption amounts and allowing non-refundable personal credits to a full amount of an individual’s regular tax and AMT liability. ATRA also provides for annual inflation adjustment to the ATM exemption amounts for years after 2012.
Federal Estate and Gift Tax: ATRA provides an annually inflation adjusted five million exclusion for estates of decedents dying after December 31, 2012, and establishes a maximum federal estate tax rate of 40%. Without this fix, the maximum federal estate tax level was scheduled to go to 55% with an applicable exclusion amount of only one million dollars. These lower levels would have been disastrous for many people so the new provisions of ATRA are very welcomed changes. In addition, ATRA makes permanent the “portability” between spouses. This portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion to the surviving spouse’s own transfers during life and at death. Using the proper estate planning tools, a husband and wife owning up to ten million dollars of assets should be able to avoid or minimize federal estate tax consequences. With regards to gift tax issues, ATRA provides a 40% tax rate and a unified estate and gift tax exemption of five million dollars for gifts made after 2012.
Additional Estate Tax Provisions: ATRA keeps in place numerous provisions relating to qualified conservation easements, qualified family owned business interests (commonly known as QFOBIs) and allowing installment payments of estate tax for closely-held businesses.
Child Tax Credit: ATRA permanently extends the child tax credit at a $1,000 level for a qualifying child (dependents under age 17 as of the close of the tax year).
Education Incentives: ATRA extends the number of tax incentives designed to promote education. ATRA extends until December 31, 2012 the above the line deduction for qualified tuition and related expenses, and extends the $2,500 above the line student loan interest deduction. ATRA also extends Bush-Era enhancements to Coverdell Education Savings Accounts which include a $2,000 maximum contribution amount.
Individual Tax Extenders: Classroom teachers will be glad to know that ATRA extends through 2013 a teacher’s classroom expense deduction. Those age 70 ½ and older who have IRA’s should be aware that ATRA extends through December 31, 2013, a provision allowing tax free distributions from IRA accounts to public charities up to a maximum of $100,000.00. Small businesses will be pleased to learn that ATRA extended enhanced “Section 179” small business expensing provisions.
I think it is fair to say that the ATRA of 2012 ended up being a stop gap measure to prevent the expiration of many Bush-Era tax cuts for middle income taxpayers. Difficult issues involving sequestration and slowing the growth of entitlement programs remain unresolved. However, ATRA provides some welcome stability from an estate planning perspective. Taking a look at your own estate planning scheme in light of ATRA would be a smart and prudent thing to do.
This article is published for information purposes only. It is not intended nor is it to be used as a substitute for independent legal advice.