On January 2, 2013, the President signed the American Taxpayer Relief Act into law, avoiding the so-called “fiscal cliff.” The new legislation has no expiration date, which means it will remain in effect until such time as Congress and the President approve additional legislation.
The following is a brief overview of the new Act.
Estate and Gift Tax Provisions
- The federal estate-tax exemption of $5 million, authorized in December 2010, has been made permanent. This exemption amount is indexed for inflation. The exemption amount for 2013 is $5.25 million. This means that married couples are exempt for up to $10.5 million from estate taxes.
- The exemption amount will remain “portable,” which means that a surviving spouse can use the unused exemption amount of a predeceased spouse.
- The federal gift tax exemption of $5 million has been made permanent.
Income Tax Provisions
- The Act provides for a permanent extension of all ordinary income tax rates below $400,000 for individuals and $450,000 for married couples.
- Long-term capital gains and dividend-tax rates for taxpayers earning below the $400,000/$450,000 thresholds are permanently extended as well (0% for taxpayers below the 25% income tax bracket and 15% for taxpayers at or above the 25% bracket). Rates for taxpayers earning above those income thresholds increased to 20%.
- The Medicare surtax of 3.8% on investment income applies to dividends and long-term capital gains above the threshold for taxpayers with modified adjusted gross income over $200,000 for individuals and $250,000 for married couples filing jointly.
With the increased estate-tax exemption amount and portability, the complexity found in many estate planning documents is no longer necessary for many clients. Clients with estates below the exemption amounts may be able to simplify their estate planning documents.
We recommend that you look at your estate planning documents and contact us to see whether your documents should be updated.