Trusts & Estates Newsletter (Summer 2012)

Summary of Estate and Income Tax Increases to Take Effect on January 1, 2013

The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, commonly known together as the Bush Tax Cuts, are set to expire as of January 1, 2013.  The sunset of the Bush Tax Cuts in addition to the implementation of the new federal health care law (the Patient Protection and Affordable Health Care Act), will result in an increase in income, estate, gift, and generation-skipping transfer (GST) tax rates and the application of new types of income taxes beginning in 2013.  Below are tables comparing the current tax laws to those to take effect beginning next year.

Income Tax Changes

 

Ordinary Income Tax Brackets

2012
Rates

2013
Rates

2013 Health Care Surtax

Single

Joint




$0 - $8,700

$0 - $17,400

10%

15%

$8,700 - $35,350

$17,400 - $70,700

15%

15%

$35,350 - $85,650

$70,700 - $142,700

25%

28%

$85,650 - $178,650

$142,700 - $217,450

28%

31%

$178,650 - $388,350

$217,450 - $388,350

33%

36%

Single filers with over $200,000 in income, and joint filers with over $250,000 of income, will pay an additional 3.8% tax on investment income and a 0.9% tax on earned income in excess of such thresholds.

Over $388,350

Over $388,350

35%

39.6%

 

Long term capital gains rates will increase from 15% to 20% for single taxpayers earning at least $35,350 as well as married taxpayers filing jointly with at least $70,700 of income. Taking into account the 3.8% tax on investment income, the tax rate on capital gains for individuals with more than $200,000 of income (or $250,000 for joint filers) will jump from 15% to 23.8%.

While in 2012 most dividends are taxed at long-term capital gains rates, beginning on January 1, 2013, all dividends will be taxed as ordinary income.  With the 3.8% tax on investment income, a taxpayer in the highest income tax bracket will see his or her tax rate on dividends more than double, increasing from 15% in 2012 to 43.4% in 2013.

Estate, Gift and GST Tax Changes

 

Tax

2012 Exemption and
Highest Marginal Rate

2013 Exemption and
Highest Marginal Rate

Estate Tax

$5,120,000

35%

$1,000,000

55%

Gift Tax

$5,120,000

35%

$1,000,000

55%

GST Tax

$5,120,000

35%

$1,360,000*

55%

*This GST Exemption is estimated. An inflation adjustment will be applied to a base amount of $1 million.

 

In 2012, an individual may have as much as $4,120,000 in exemption available that he or she will not have in 2013. Married couples may have as much as $8,240,000 more exemption available. By taking advantage of the 2012 exemptions and rates, an individual potentially can save his or her estate $2,266,000 in estate/gift taxes; a married couple's estate could save as much as $4,532,000. These are amounts that will pass to family members or other intended beneficiaries instead of the government.

During 2012, the Annual Exclusion Amount, or the maximum gift an individual may make to another without reporting the gift tax, is $13,000 ($26,000 for married couples acting together).  Under current law, this amount will not decrease, and could possibly increase based on an inflation index, for gifts made in 2013.

Planning Opportunities

In view of these scheduled changes in the tax laws, individuals should strategize and consider completing certain transactions before the end of the year, capital transactions and significant gifts being among them.  Take advantage of the more favorable 2012 tax situation before it is too late.

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