Major Tax Act Impacting Estate and Business Tax Planning Passed

On January 1, 2013, both Houses of Congress passed a tax act structured to avoid the “fiscal cliff” (i.e. several tax increases and the expiration of numerous tax deductions and credits set to take place at the commencement of 2013). While more analysis of these new laws will be forthcoming as the details of the tax act emerge, below is a brief synopsis of the act’s major tax provisions impacting our clients’ estate, gift and business tax planning.

  • •  Estate/Gift/Generation Skipping Tax Provisions – Under the sunset provisions of the expiring tax laws, an individual’s estate tax exemption, lifetime gift tax exemption and generation skipping tax exemption would have dropped from a collective $5,000,000 per person (indexed for inflation) to $1,000,000 per person, and decedents’ estates over $1,000,000 would be subject to a tax rate of up to 55% (up from 35% in 2012). Under the new tax act, the estate tax exemption, gift tax exemption and generation skipping tax exemption amounts all remain at $5,000,000 per person (indexed for inflation) and will be adjusted for inflation each year. Decedents’ estates that exceed the exemption threshold will be taxed at a rate of 40%.

  • •  Capital Gains and Dividend Rates – Under the sunset provisions of the expiring tax laws, all capital gains would have become subject to a tax rate of up to 20% and dividends were to be taxed at an individual’s highest marginal income levels (up from 15% in 2012). Instead, under the new tax act, capital gains and dividends will both generally be subject to a maximum 20% tax rate for higher income earners. However, it is important to note that commencing this year, an additional 3.8% surtax will be charged on investment-type income and gains, which could result in tax rates as high as 23.8% in applicable instances.

  • •  Other Important Changes – Additional important provisions under the tax act include:

    • -The new act does not include an extension of the 2% payroll tax cut enacted in late 2010. As a result, the “payroll
        tax holiday” expired effective January 1, 2013.
       
    • -Current income tax rates for all individuals earning less than $400,000 individually and $450,000 jointly will remain
        at 2012 levels. Individuals with higher income will be taxed on such income at a rate of 39.6%.
       
    • -Personal exemptions are reduced and itemized deductions will be limited for individuals earning over $250,000
        individually and $300,000 jointly.