The highlights of this new legislation, which was signed by the President on January 2, 2013, include the following:
Estate, Gift and GST Tax Provisions
1. Estate and Gift Tax Exemption: For individuals dying and gifts made after 2012, there will be a $5 million exemption, indexed for inflation. This exemption, adjusted for inflation, was $5,120,000 in 2012, and is estimated to be $5,250,000 for 2013, after adjusting for inflation.
2. Estate and Gift Tax Rate: The top estate, gift and GST tax rate is permanently increased to 40% in 2013, from 35% in 2012.
3. Portability of Estate Tax Exemption: The estate tax exemption will continue to be portable between spouses, which means that a surviving spouse can use the decedent spouse’s unused federal estate and gift tax exemption.
4. Gift Tax Annual Exclusion: The gift tax annual exclusion in 2013 is $14,000. In other words, that is the maximum amount a donor can transfer every year to each donee before reducing the lifetime exemption.
5. No Restrictions on Estate Planning Techniques: The Act does not restrict the use of specific estate planning techniques, such as grantor retained annuity trusts, valuation discounts, family limited partnerships, dynasty trusts or grantor trusts, as was proposed by President Obama. Such provisions could still be considered in future laws.
6. State Death Taxes: The Act continues a federal deduction for state death taxes.
7. IRA Distributions to Charity: Provision allowing tax-free distributions (up to $100,000) from IRAs to public charities by individuals age 70 ½ and older is extended through December 31, 2013.
Income Tax Provisions
1. Income Tax Rate: For 2013, the top income tax rate increases to 39.6%, from 35% in 2012, for individuals making more than $400,000 a year, or $450,000 for joint filers, or $425,000 for heads of household.
2. Payroll Taxes: The two percentage point reduction in payroll taxes (effective in 2011 and 2012) was allowed to expire.
3. Capital Gains Tax Rate: Beginning in 2013, capital gains and dividends will be taxed at 20%, up from 15%, for individuals making more than $400,000 a year, or $450,000 for joint filers.
4. Alternative Minimum Tax: Higher AMT exemption amounts for years after 2011 are made permanent.
5. Personal Exemption Phase-Out: This phase-out is being reinstated, with a starting threshold of $250,000 for single filers and $300,000 for joint filers. Generally, this means that the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 by which the taxpayer’s AGI exceeds the threshold.
6. Itemized Deduction Phase-Out: This phase-out is being reinstated, with a starting threshold of $250,000 for single filers and $300,000 for joint filers. Generally, this means that the total amount of itemized deductions that can be claimed by a taxpayers subject to the limitation is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold.