American Taxpayer Relief Act of 2012 Has Generous Estate and Gift Tax Provisions
On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012. The headlines have mostly focused on the income tax provisions; however, there are some very welcome provisions in the estate, gift, and generation skipping transfer tax areas.
First, I will review the significant income tax changes. The tax brackets that applied during 2012 will continue indefinitely, except that individuals earning more than $400,000 or couples making more than $450,000 will have income over this threshold taxed at 39.6% rather than 35%. The $400,000 and $450,000 thresholds will be indexed for inflation beginning after this year. There will be a phase out of personal exemptions and itemized deductions for individuals with more than $300,000 of adjusted gross income.
In the estate, gift, and generation skipping tax areas, the exemption equals $5 million indexed for inflation. The inflation-adjusted exemption for 2013 will be $5,250,000. This means that those people who thought they used all of their gift tax exemption in 2012 actually have more gift exemption in 2013. It also means that the fire drill at the end of December was unnecessary. Portability, which was introduced for the first time in 2010, is now made “permanent.” The combination of the higher exemption and portability has significant ramifications that we will be writing about in future articles.
Congress chose not to close any of the transfer tax “loopholes” that President Obama wants to eliminate. However, these could still appear as revenue raisers during the deficit reduction debate that will occur in the new Congress.
The capital gains and dividend rates will remain at 15%, except that individuals making above $400,000 or couples making more than $450,000 will be taxed at 20% on income above the threshold amount.
Finally, the Act restores the ability of individuals who are older than 70½ years of age to make a transfer directly from their IRA to charity. You will be able to give $200,000 this year; however, you must give $100,000 before the end of January. The other $100,000 may be given any time before December 31, 2013. Since there is a phase out of itemized deductions for certain high-income individuals, it will be a material decrease in taxes to give money directly from your IRA to charity rather than withdrawing funds and then making a charitable contribution. If you took your required minimum distribution during the month of December of 2012, you can treat it as a distribution directly from the IRA to charity (i.e., you do not have to take it into income in 2012), if you transferred cash to charity in December (after the withdrawal) or transfer cash to a qualified charity prior to February 1, 2013. If you characterize any charitable cash gifts made in December or January as coming from your IRA, this will count towards the $100,000 that you can give before January 31, 2013.