PERILS OF FISCAL CLIFF AVERTED
Finally, on January 1, 2013, the Senate and the House passed the "American Taxpayer Relief Act" (the "Act") to give taxpayers some certainty regarding income taxes and transfer taxes (gift, estate, and generation-skipping transfer taxes). Although the government technically went over the "fiscal cliff" (the name given to the expiration of the Bush era tax cuts), the passage of the Act will negate the adverse impact that the fiscal cliff would have had on most American taxpayers. It is anticipated that President Obama will soon sign the Act into law.
The Act will prevent some scheduled tax increases from taking effect and will retain many favorable tax breaks that would otherwise have expired on January 1, 2013. In addition, the Act will increase income taxes for those earning more than $400,000 ($450,000 for married taxpayers, $425,000 for head of household), and will increase the estate, gift, and generation-skipping tax rates from 35% to 40%.
The Act is good news for estate planning. It prevents the reduction of the transfer tax exemptions to $1,000,000, and instead permanently retains the exemptions at $5,000,000, indexed for inflation. In 2012, the exemptions for gift, estate, and generation-skipping taxes were each $5,120,000. These amounts will increase to $5,250,000 or greater for 2013.
Portability of a spouse's unused exemption amount has been made permanent, so that a husband and wife together can exempt a total of $10,000,000 (indexed for inflation) from transfer taxes.
On another note, and unrelated to the Act, the gift tax annual exclusion amount has increased from $13,000 to $14,000 for 2013.
In summary, in connection with transfer taxes, the 2012 rules have been retained. The only change is the increase in the tax rate from 35% to 40% on taxable gifts, estates and generation skipping transfers.