Fiscal Cliff Avoided – $5 Million Estate and Gift Tax Exemption Saved and Much More!
By: PETER REISS, ESQ.
The American Taxpayer Relief Act was signed into law
On January 2, 2013, the day after the Senate and House passed the bill, President Obama signed the American Taxpayer Relief Act (ATRA) into law. ATRA makes permanent many tax cuts enacted in 2001 and 2003, makes a permanent patch on the alternative minimum tax (AMT) and extends many individual and business tax provisions.
Here is a summary of many of the ATRA features.
PERMANENT EFFECT ON ESTATE, GIFT, AND GST TAXES
Many of the temporary provisions from prior tax acts were made permanent ending much confusion and speculation.
1. Federal Estate, Gift and GST Taxes − The estate tax, gift tax and generation skipping tax exclusion amounts are all set at $5 million and indexed for inflation after 2011. For 2013 the exemption amount is $5.25 million. The top estate, gift, and GST tax rate is increased from 35 % to 40%.
2. Portability − Beginning for taxpayers dying after Dec. 31, 2010 the estate tax exclusion becomes “portable” between spouses. This means that the surviving spouse’s exemption is increased by any exemption not used at the first spouse’s death. However, this is not automatic; it must elected by timely filing a 706 estate tax return.
3. Carryover Basis − For most capital assets transferred at the time of death the beneficiary receives a “stepped up” basis to its fair market value at the date of death.
INDIVIDUAL INCOME TAX
1. Tax brackets − The 10%, 15%, 25%, 28%, 33% and 35% tax brackets under the previous tax act are retained and a new top rate of 39.6% is added for single filers with taxable income over $400,000, $425,000 for head-of-households, $450,000 for married filing jointly and $225,000 for married filing separately.
2. Marriage Penalty − Permanently expands marriage penalty relief for standard deduction, the 15% bracket, and the earned income tax credit.
3. Qualified Capital Gains & Dividends − Qualified capital gains and dividends continue to be taxed 0% for 10% taxpayers and 15% taxpayers, 15% for those under the top tax 39.6% rate, and 20% for the new top tax bracket.
4. Itemized Deductions & Personal exemptions − The itemized deduction phase-out and the personal exemption phase-out are reinstated at a higher threshold of adjusted gross income as follows: $250,000 for single filers, $275,000 for head-of-households filers, $300,000 for married filling jointly and $150,000 for married filing separately.
5. AMT − The alternative minimum tax (AMT) exemption is permanently indexed for inflation. For 2012 the exemption amounts are $78,750 for married filers and $50,600 for single filers.
6. Child Tax Credit − Was made permanent at $1,000 and extends for five years certain modifications relating to the additional tax credit.
EXTENSION OF EXPIRED PROVISIONS
Some of the provisions that have been extended through 2013 include:
1. A deduction for up to $250 of eligible educator expenses.
2. The election to deduct state and local sales taxes in lieu of state and local income.
3. A qualified tuition deduction of up to $4,000.
4. Up to $100,000 of qualified charitable distributions, from individual retirement accounts are excludable from income if made on or after the date the IRA owner turns age 70 1/2.
5. A 100 percent exclusion of gain for regular and alternative minimum tax purposes on certain small business stock, issued after February 17, 2009 and before January 1, 2014.
6. Income from the discharge of qualified principal residence indebtedness is generally excluded from gross income.
Some of the business provisions extended through 2013 include:
1. Bonus Depreciation and 100% expensing of certain business assets placed in service before January 1, 2014.
2. Indian employment credit employed before 2014.
3. Accelerated depreciation recovery periods for qualified Indian reservation for through 2013.
4. New Markets Tax Credit (NMTC) permitting up to $3.5 billion in qualified equity investments through 2013.
5. Railroad track maintenance credit through 2013.
6. 15-year straight-line depreciation for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements placed in service before 2014.
7. The seven-year depreciation recovery period for motorsports entertainment through 2013.
8. Enhanced charitable deductions for corporate contributions of food inventory.
9. Extended S corporation shareholders may continue to reduce their stock basis by the cost basis of property contributed to charity rather than the property’s fair market value through 2013.
10. Special expensing for certain film and television productions.
11. The Work Opportunity Tax Credit is extended to cover qualifying individuals.
Some of the energy provisions extended through 2013 include:
1. Energy efficient appliance credits.
2. The credit for non-business energy property.
3. The biodiesel and renewable diesel income tax credit, excise tax credit and payment provisions.
4. The new energy-efficient home credit for eligible contractors applies to homes.
5. The alternative fuel credit.
Not all pre ATRA provisions were extended. Several provisions that were not extended include:
1. The Act did not extend the 2% reduction in payroll and self-employment taxes, nor did it delay or repeal any aspect of the 2010 health care reform act, including the new Medicare taxes imposed on “high income” households.
2. Look-through treatment for RIC stock for determining gross estate of nonresidents.
3. Enhanced deductions for corporate charitable contributions of gifts of book inventories to public schools.
4. Enhanced corporate deduction for corporate charitable contributions of computers.
5. Expensing of brownfield environmental remediation costs.
6. Suspension of percentage depletion limits for oil and gas marginal wells.
7. Credits for refined coal facilities.
8. Percentage depletion for oil and gas from marginal wells.
9. Section 1603 grants in lieu of energy credits.
Also missing from ATRA is the state death tax credit which would have allowed states like California and Florida to receive a portion of the any federal estate tax that is due. The credit was phased out between 2001 and 2004 and replaced with a deduction.
Though many “high income” individuals are now faced with a substantially higher tax bill and wage earners were not given a further extension on the 2% reduction in payroll and self-employment taxes, many taxpayers were spared a significant income tax increase. ATRA did provide some resemblance of certainty by making permanent many tax provisions. Notable changes are the permanent Bush-era tax rates preserved for most, permanent uniform inflation indexed estate, gift, and GST taxes, and the permanent adjustment to the AMT exemption.
This overview of the 2012 American Taxpayer Relief Act was designed to only alert you to a number of the new tax changes. Be sure to check with your personal tax professionals to see how the new law affects you.
This article is not legal advice and is provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction.