MBA / FEATURE
The American Taxpayer Relief Act of 2012: The Federal Estate, Gift, GST and Selected 2013 Income Tax Changes By Michael J. Moyer, Esq.
T
he American Taxpayer Relief Act of 2012, P.L. 112-240 (the “Act”) was signed into law on January 2, 2013, following a period of taxpayer uncertainty and busy 2012 year-end planning for the possibility of a return to pre-EGTRRA tax laws. For 2013, the applicable exclusion amounts from Federal Estate, Gift, and Generation-skipping transfer (GST) taxes were increased to $5.25 million, per individual, to be annually adjusted for inflation. The Federal Estate, Gift and GST tax rates were increased to forty (40%) percent. Portability among spouses, or the ability to use a predeceased spouse’s applicable exclusion amount on the second-to-die spouse’s tax return, has been made permanent, meaning generally a married couple both dying in 2013 will not pay Federal Estate or Gift tax on up to $10.5 million. Notably, GST was not made portable among spouses, although deemed automatic allocations of GST exemption were retained in the Act. The state death tax deduction (as opposed to a credit) has been made permanent. The annual exclusion for making gift-tax free transfers increased to $14,000 or $28,000 for married taxpayers who split gifts. The Act also imposed significant changes to the Federal income taxation of estates and trusts, and individual beneficiaries of those entities. Unlike individuals, the new top Federal income tax rates of 39.6% apply for trusts and estates with over $11,950
only the ultra-high-net worth individuals, an increasing number of states will likely enact or retain their own separate estate taxes, with exemptions de-coupled from the Federal exemptions. For example, in nearby New Jersey and New York, the applicable exclusion amounts are only $675,000 and $1 million, respectively, in undistributed income. Income, and portability is not recognized. Pennincluding trust and estate income sylvania continues to impose its inheridistributed to beneficiaries, is taxed at tance tax on net transfers to non-spousal the new 39.6% top rate, which now and non tax-exempt beneficiaries. applies to couples with over $450,000 Coverage of planning opportuniand individuals over $400,000 in taxable income. For capital gains above ties under the Act is beyond the scope of this particular article. While they the thresholds mentioned, rates were last, the higher exemptions will likely increased to twenty-percent (20%). mean that gifting into irrevocable trusts Another consideration in 2013 will continue to play a significant role is the 3.8% Medicare surtax on net investment income (part of The Afford- for high-net-worth estate planning, although a competing interest will able Care Act of 2010), which applies be the income tax benefit of holding to individuals whose adjusted gross income exceeds $200,000 or $250,000 property until death. The Act is likely to increase focus on Federal income for married taxpayers, and for trusts and estates having over $11,950 in un- tax consequences of Trusts and Estates, distributed net investment income. The and many clients may decide now is the time to take action, before the winds of 3.8% surtax applies only to the lesser tax reform change again. of: (i) the amount by which the taxpayer’s modified adjusted gross income Michael J. Moyer, Esq. (LL.M. in exceeds the applicable threshold or (ii) Taxation) is an Associate Attorney at the taxpayer’s net investment income. Friedman Schuman, P.C., a full-service Rather than expiring sunset law firm headquartered in Jenkintown, periods, the Act made these higher exemptions “permanent,” but tax laws are PA. Michael practices in Tax, Estate Planning and Wealth Preservation, Estate intrinsically tied to politics and these and Trust Administration, and Corporate exemptions could obviously change Law, and he is admitted in Pennsylvania, in the future. To fill the void created New Jersey and New York. by a Federal Estate tax that now taxes
SIDEBAR
16
SPRING 2013