At year end Congress enacted the American Taxpayer Relief Act of 2012 (HR 8), which avoided a plunge over the so-called “fiscal cliff.” That supposed cataclysm would have resulted from a combination of the sunset of the Bush 2001 tax cuts and the automatic government spending cuts negotiated last summer in return for an extension of the federal debt ceiling. The 2001 law freed nearly half of American taxpayers from the need to pay income taxes (although not payroll taxes). Moreover, the law meant that over 30% of taxpayers, in addition to paying no income taxes, were receiving a transfer payment from Uncle Sam in the form of the Earned Income Tax Credit. Failure to continue the Bush tax regime (as tweaked in late 2010) would have caused a spike in income tax rates for nearly everyone.
HR 8 maintains income tax rates for most taxpayers, while raising rates on the wealthiest ones. New taxes under the new “Obama Care” health law also arrive in 2013. How does the American Taxpayer Relief Act affect the average estate plan? Each person’s estate is different, but the main points are as follows:
- Unemployment benefits for the long-term unemployed have been extended for one year.
- Persons earning over $400,000 ($450,000 for couples) will be taxed at the Clinton-era maximum rate of 39.6%.
- Rates for individuals earning less than that amount stay the same.
- The tax on dividends and interest increases to 20% for those individuals earning over $400,000 ($450,000 for couples), while remaining at the 15% level for individuals earning less.
- Inflation since the passage of the Alternate Minimum Tax was about to make the vast majority of taxpayers earning between $100,000 and $200,000 subject to the tax. The new tax law shields the middle class from the AMT, keeping income levels subject to the tax at the level of a dozen years ago. An inflation adjustment will keep taxpayers from being arbitrarily pushed in front of the tax gun in the future.
- The Earned Income Tax Credit, the child-care tax credit and the college tuition credit were extended for five years.
- The temporary reduction from 6.2% to 4.2% in the Social Security payroll tax was NOT extended.
- For upper income taxpayers the limit on itemized deductions (3% reduction) for income in excess of $300,000 for couples filing jointly ($250,000 for singles) has been reinstated; additionally, such taxpayers will suffer a phase-out of their personal exemptions.
- The exemption for gift, estate and generation-skipping transfer taxes has been made permanent at the $5 million level and indexed for inflation.
- The tax rate for estate and gift transfers in excess of $5 million has increased from 35% to 40%.
- The Section 179 investment tax credit, which allows businesses to expense investments up to $500,000 in machinery and equipment (as well as investments in certain vehicles and software) was extended to years 2012 and 2013. (Certain limitations apply.)
- The research and development tax credit was extended through 2013.
- The right to depreciate Qualified Leasehold Improvements, Qualified Restaurant Property and Qualified Retail property over 15 years was extended through 2013.
Additional changes to the Tax Code may well flow from the forthcoming negotiations concerning an increase in the federal debt ceiling. We will try to provide a regular series of updates as the budget negotiations themselves unfold. It may be that there are forthcoming changes to the tax code that may affect your estate plan. Contact one of our experienced estate planning attorneys today if you have questions about how tax changes might affect your estate planning goals.