The American Taxpayer Relief Act of 2012 was signed into law on Jan. 3, 2013. This new legislation makes some important changes that impact estate planning and the probate of decedent’s estates. The Act extends some tax cuts, but reinstates other provisions.
The estate tax provisions were permanently extended. There is an unlimited marital deduction; assets passing to a surviving spouse are exempt from federal estate tax. When the surviving spouse passes away (or if there is no spouse), estate tax applies to estates larger than a certain limit. There is a $5,000,000 exclusion that is adjusted annually for inflation. In 2013, the first $5.25 million of an estate is not taxed. The top estate tax rate was scheduled to go from 35 percent to 55 percent. Instead, it only increased to 40 percent.
Because of the marital deduction, there will be no tax owed when the first spouse passes away. The second spouse to die, however, may have estate tax issues if the estate is large enough. There is a portability feature that allows the estate of a deceased spouse to transfer any unused estate tax exemption to the surviving spouse, which may reduce a survivor’s tax liability.
The 2010 Affordable Care Act provides for a new Medicare tax on investment income. The 3.8 percent surtax is in effect for individuals, as well as for trusts and estates. The tax is applied to the next taxable income of trusts after distributions to beneficiaries and comes into effect at the point that the trust’s income exceeds roughly $12,000.
Long-term capital gains tax rates have also changed. The tax rates that were in place have been permanently extended for most individuals. For individuals in the 10 percent or 15 percent marginal income tax bracket, the capital gains tax is 0 percent. For taxpayers in the 25 percent, 28 percent, 33 percent or 35 percent tax bracket, a 15 percent maximum rate will generally apply to capital gains.
For taxpayers in the new top tax bracket of 39.6 percent ($400,000 for individuals or $450,000 for married filing jointly), the long-term capital tax rate is now 20 percent. The new Medicare tax on investment income also applies, making the long-term capital gains rate for the top tax bracket 23.8 percent.
Be proactive in protecting your assets and planning for the distribution of your wealth. Strategic gifting, trust creation, and estate tax planning while you are alive can reduce or eliminate taxes after death.
Information provided by Ross Barnett, attorney for Abendroth and Russell Law Firm, 2560 73rd St., Urbandale, 278-0623, www.ARPCLaw.com.