Special Edition - Fiscal Cliff Updates - Estate and Income Tax Law Changes for 2013

Davis, Agnor, Rapaport & Skalny LLC

Press Release

Davis, Agnor, Rapaport & Skalny LLC Announce

Important Updates related to the "fiscal cliff":

Columbia, MD - January 2, 2013 - The deal is done? Maybe. The "fiscal cliff" was avoided? Perhaps. Will "estate planning" no longer be an oxymoron? Yes!

The American Taxpayer Relief Act of 2012 ("ATRA"), with broad bipartisan support, was finally passed by Congress in the very early hours of 2013. With all of the intense drama and brinksmanship that could be mustered in Washington, both the Senate and the House of Representatives found enough common ground to pass a bill that provides the long yearned for certainty with regard to how the Federal Estate Tax will impact estate tax planning options in the future.

Further, Congress also made various adjustments to the Federal Income Tax in order to help pay for some of the costs of government.

First the good news.

Federal Estate Tax Changes

With the passage of ATRA, taxable estates of less than $5 million will not be subject to the estate tax at the federal level. And, this number will be annually adjusted for inflation, which means that Congress should not have to go back and meddle with this tax for some time. Taxable estates above $5 million will be subject to a 40% tax for any amount in excess of $5 million.

As was true with the 2010 estate tax law changes, the $5 million exemption will also apply to lifetime gifts and generation-skipping transfers. In other words, the estate tax and gift tax will remain unified.

In 2010, the concept of portability was first introduced in estate tax planning, and this portability function will remain in place under ATRA. This means that upon the death of one spouse, if the full amount of that spouse's $5 million exemption is not used by that spouse's estate, the unused exemption which remains can be used by the surviving spouse upon that spouse's death. Thus, a married couple should be able to take full advantage of both spouses' $5 million exemptions. Note, however, that the Personal Representative of the first spouse to die's estate must elect portability in order to preserve this option.

Finally, and one of the best reasons to applaud this aspect of the fiscal cliff negotiations, all of these changes are permanent in nature. Gone is the 10-year phase out of the estate tax that was included with the so-called "Bush tax cuts" back in 2001, a scheme that everyone knew almost from the very beginning would never happen. Also gone is the 2-year sunset period that was incorporated into the 2010 tax law changes. Now, with relative permanency, estate tax planning decisions can be made with some sense that those decisions won't have to be revisited every year or two.

Now, for the bad news.

Nothing under ATRA affects the requirement to pay the Maryland Estate Tax. More will be written in a later post about this tax. For now, it is enough to know that the planning options should be explored to minimize the impact of this tax on estates.

Federal Income Tax Change

Federal income taxes were also addressed in ATRA. The following changes will be incorporated for 2013:

1. Income Tax. The highest marginal tax rate was increased from 35% to 39.6% for those individuals with incomes above $400,000 and married couples with incomes above $450,000. This is over and above the 0.9% increase for individuals with incomes above $200,000 and couples with incomes above $250,000 that was included in the Affordable Care Act ("Obama Care") for 2013.

2. Capital Gains/Dividend Tax. The tax on capital gains and dividends was raised to 20% for those individuals with taxable incomes of $400,000 or more and for those married couples with taxable incomes of $450,000 or more. For everyone else, these taxes will remain as before. However, note that under Obama Care, this tax was already scheduled to rise by 3.8% in 2013 for those taxpayers with modified adjusted gross incomes in excess of $200,000/$250,000, and this increase remains in place. This means that the effective "investment income" tax rate will increase to 18.8% and 23.8%, respectively.

3. PEPS and Pease. The phase out for personal exemptions ("PEPS") and itemized deductions ("Pease") will be reinstated. The phase outs for these tax deductions will start at $250,000 for individuals and $300,000 for married couples. These levels will be inflation adjusted in the future.

4. AMT. A permanent "patch" for the Alternate Minimum Tax was incorporated into ATRA, a very welcome change for many people. The exemption for individuals was increased from $33,750 to $50,600, and for married couples, this exemption was increased from $45,000 to $78,750. These exemptions will be inflation adjusted in the future.

Did ATRA fix everything? No. The deficit ceiling and spending cuts will occupy the new Congress as 2013 begins. But, at least some certainty was injected into the tax system. Maybe we can breathe just a little easier - for a while.

Written by Michael Davis, our Senior Partner at DARS and Chair of our Estate Planning Department, who will be attending the Heckerling Institute in Orlando, Florida, starting on January 14th. This is a conference attended by over 2700 tax planning attorneys from around the country. Mike will be sending out updates to this newsletter from the Heckerling Institute as he learns more about the planning options created under ATRA.

To our readers

This press release is being provided to the clients and friends of Davis, Agnor, Rapaport & Skalny. Should there be any questions, please forward them to DARS so that they may be addressed in future posts.

About Davis, Agnor, Rapaport & Skalny LLC

Davis, Agnor, Rapaport & Skalny, LLC, is a multi-disciplinary law firm offering a broad spectrum of legal services to businesses and individuals. The Howard County-based firm is committed to an individualized, client-driven approach to legal representation. Practice areas include business and transactional; estate planning and elder law; real estate; civil litigation; banking and financial institutions; community associations (condominiums & homeowners associations); intellectual property & technology law; nonprofit organizations; guardianships, will contests & fiduciary litigation; probate & trust administration; labor & employment law and tax planning and litigation. For more information, visit our website.