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Estate Tax and Income Tax Laws for 2013

Summary of the American Taxpayer Relief Act

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After some last minute shenanigans and political posturing, in the wee hours of January 1, 2013 the U.S. Senate passed the American Taxpayer Relief Act ("ATRA" for short) by a margin of 89 to 8. The U.S. House of Representatives, after initially balking at the provisions of ATRA, which does not include any significant spending cuts, ended up passing the bill around 11 p.m. on January 1 by a margin of 257 to 167. Shortly after the House passed ATRA, President Obama made a public statement in support of it and then within 30 minutes was whisked away to his Hawaiian vacation home, where he signed the bill into law using an autopen on January 2, 2013.

Now that all of the drama over avoiding the so-called fiscal cliff has ended, below is a summary of what ATRA means for American taxpayers in 2013 as well as some retroactive changes for 2012.

Individual Income Tax Rates

ATRA did not change the individual income tax rates for the majority of American taxpayers, so the 10%, 15%, 25%, 28%, 33% and 35% rates remain in effect for most taxpayers in 2013. However, a new top rate of 39.6% has gone into effect in 2013 for taxpayers who earn above the following income levels:

  • $225,000 for married taxpayers who file separately
  • $400,000 for single taxpayers
  • $425,000 for head of household taxpayers
  • $450,000 for married, joint-filing taxpayers

Capital Gains and Dividend Rates

ATRA also did not change the capital gains and dividend rates for the majority of American taxpayers, so the 15% rate remains in effect in 2013 for taxpayers in the 25%, 28%, 33% and 35% brackets. However, a new maximum rate of 20% goes into effect in 2013 for taxpayers who earn above the following income levels:

  • $225,000 for married taxpayers who file separately
  • $400,000 for single taxpayers
  • $425,000 for head of household taxpayers
  • $450,000 for married, joint-filing taxpayers

Also, do not overlook the 3.8% Medicare surtax on net investment income that went into effect on January 1, 2013 for the following taxpayers:

  • Married taxpayers, filing jointly - $250,000
  • Married taxpayers, filing separately - $125,000
  • All other individual taxpayers - $200,000

The 3.8% surtax is part of the provisions of The Patient Protection and Affordable Care Act (Obamacare) that will help support the expanding costs of Medicare. For individual taxpayers (as opposed to estates and trusts), the surtax is based on the lesser of (1) net investment income, or (2) the amount by which modified adjusted gross income (MAGI) exceeds the threshold amount in that tax year.

For estates and trusts, the 3.8% surtax is based on the lesser of (1) the undistributed net investment income of a trust or estate, or (2) the excess of adjusted gross income over the top bracket for estate and trust income (the brackets are adjusted for inflation and the top bracket is expected to be approximately $12,000 in 2013).

Personal Exemption Phaseout

Under ATRA, in 2013 the personal exemption phaseout begins at the following adjusted gross income thresholds:

  • $150,000 for married taxpayers who file separately
  • $250,000 for single taxpayers
  • $275,000 for head of household taxpayers
  • $300,000 for married, joint-filing taxpayers

Itemized Deduction Phaseout

Under ATRA, in 2013 the itemized deduction phaseout, which may result in the loss of up to 80% of itemized deductions (such mortgage interest, property taxes, state and local income taxes, charitable contributions), begins at the following adjusted gross income thresholds:

  • $150,000 for married taxpayers who file separately
  • $250,000 for single taxpayers
  • $275,000 for head of household taxpayers
  • $300,000 for married, joint-filing taxpayers

Alternative Minimum Tax

Under ATRA, a permanent patch has been made to the alternative minimum tax ("AMT") rules, which is retroactive back to January 1, 2012. The exemption amounts for 2012 are $50,600 for individuals and $78,750 for married couples filing jointly and will be indexed for inflation in future years. In addition, nonrefundable personal credits against the AMT will be allowed.

Deduction for State and Local Sales Taxes

ATRA retroactively restored the deduction for state and local sales taxes for the 2012 tax year and extends it through December 31, 2013.

Estate Tax, Gift Tax and Generation Skipping Transfer Tax

ATRA makes the rules governing estate taxes, gift taxes and generation skipping transfer taxes that went into effect under the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("TRUIRJCA") permanent for 2013 and beyond, with one exception - the maximum tax rate for each of these taxes is increased from 35% to 40%. Since TRUIRJCA unified the estate tax, gift tax and generation skipping transfer tax exemptions and provided for inflation indexing of these exemptions beginning in 2012, the 2013 exemption for each of these taxes is $5,250,000. In addition, TRUIRJCA introduced the concept of portability of the estate tax exemption between married couples, and so ATRA has made portability permanent.

Charitable Donations from IRAs

Under ATRA, in 2013 IRA owners who have reached the age of 70 1/2 can make donations of up to $100,000 to charitable organizations directly from their IRAs and have the donations count towards their IRA required minimum distributions. If this is done, then although the IRA owner will not be able to take a charitable deduction for this type of donation, the amount donated will not be included in the IRA owner's adjusted gross income.

ATRA also retroactively restored this income tax break for the 2012 tax year; however, specific rules apply and only until January 31, 2013 - if an IRA owner took a required minimum distribution in cash at any time during December 2012, then he or she can send an amount equal to the December distribution to one or more charitable organizations before January 31, 2013, and exclude the charitable donation from his or her 2012 income (but not take a charitable deduction for the donation).

So What's Missing From the American Taxpayer Relief Act?

Notable exclusions from ATRA include the following:

  • Expiration of the Social Security payroll tax break. The temporary reduction of the Social Security payroll tax that went into effect in 2011 and was extended for 2012 was not addressed by ATRA, so in 2013 the share of the Social Security payroll tax paid by workers will increase from 4.2% to 6.2% for employees and 10.4% to 12.4% for those who are self-employed.




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  • The pick tax remains dormant. The pick up tax, which was a state estate tax that was collected based on a portion of the federal estate tax bill prior to 2005 and was not reinstated by TRUIRJCA, was also not resurrected by ATRA. This means that states like California, which was expecting the pick up tax to come back in 2013, and Florida will not see a revenue boon from a state estate tax in 2013 or future years.

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