by Charles E. McWilliams, Jr.
As tax season approaches I receive more frequent questions from my clients about what impact, if any, the American Taxpayer Relief Act of 2012 (“ATRA”) will have on them this year. The short answer is, “it depends”, but for some clients, the impact may be dramatic. For those of you who do not know about this legislation, ATRA is the new tax legislation that was signed into law on January 2, 2013, and it includes some very significant changes, some of which are summarized below.
Estate Taxes. The unified credit against estate taxes remains indexed for inflation and will be $5.25 million per person in 2013, with a rate of 40% on the excess. Fortunately, “portability” — the ability of spouses to share their unused exclusion amount — remains intact, but just as before, you must file an estate tax return (Form 706) to elect portability of the deceased spouse’s unused exclusion amount.
The annual gift tax exclusion amount increased to $14,000 per person for 2013, and Congress remained silent on family limited partnerships and other discounting strategies which still remain viable.
Investment Income. The 15% long-term capital gain bracket is retained for many taxpayers, but the ATRA also enacted a 0% bracket for certain low-income taxpayers, and a 20% bracket for taxpayers with an adjusted gross income (“AGI”) in excess of $400,000 for single taxpayers and $450,000 for couples. Worse yet, these capital gain brackets are combined with a new Medicare Tax on Investment Income equal to 3.8% for individuals with AGI in excess of $200,000 and couples in excess of $250,000. That means you could pay up to 23.8% on long-term capital gains in 2013, not including state taxes — that is a 59% increase in the tax rate on long-term capital gains!
Income Taxes. The ATRA added a new top tax bracket of 39.6% for single taxpayers with AGI in excess of $400,000, and $450,000 for couples. The phase out of itemized deductions beginning at $250,000 of AGI will also serve to increase the effective tax rate for many taxpayers, and the new Hospital Insurance Tax of 0.9% will be deducted from the payroll of single taxpayers making more than $200,000 ($250,000 for couples). Combining the above changes with an end to the payroll tax holiday and additional limitations on itemized deductions, most taxpayers earning more than $200,000 will pay several thousand dollars more in taxes in 2013.
This is not a comprehensive analysis of the ATRA changes, as there were literally hundreds of other changes to the tax code, but these are the most relevant changes for most taxpayers. Unfortunately, these changes will result in a net tax increase for most of our clients, but I cannot stress enough how important it is for you to have a relationship with a knowledgeable and experienced accountant who can help you navigate through these changes. There are numerous strategies that can be used to reduce your effective tax rate both during your lifetime and at death, but neither your accountant nor I can help you if you do not seek our assistance. In that light, please let me know if you would like to discuss your estate or business tax concerns in more detail, and I will gladly refer you to a qualified accountant if needed.
