The “Fiscal Cliff” kept financial advisors and their clients in a state of flux for the better part of 2012. To avert this looming financial crisis, the U.S. House of Representatives approved the American Taxpayer Relief Act of 2012 (the Act) on January 1, 2013. Below we’ve outlined several provisions which may affect you and some considerations to help you offset the impact.
- Individual Income Tax Rates
- Capital Gains/Dividend Sunsets
- Permanent AMT Relief
- The Pease Limitation
- Personal Exemption Phaseout
- Federal Estate, Gift and GST Tax
Individual Income Tax Rates
Taxpayers with taxable income above $400,000 ($450,000 for married taxpayers, $425,000 for head of households) will be taxed at a 39.6 percent rate. This rate will be adjusted for inflation after 2013.
Consider this: If you’re not already doing so, maximize your tax-advantaged accounts such as IRA, 401k and HSA savings. If you are taking full advantage of these options, consider a deferred annuity for additional tax advantages. Bonds are taxed at ordinary income rates and municipal bonds provide federal tax-free income but with lower yields.
Capital Gains/ Dividend Sunsets
For individuals/ families in the $400,000/$450,000 taxable income bracket, the capital gains and dividend rate is now 20 percent, up from 15 percent. Qualified dividends continue to be taxed at capital gains rates for all taxpayers.
Consider this: Minimize taxable gains through tax-loss harvesting or by holding tax inefficient assets in tax-deferred accounts.
Permanent AMT Relief
The Act provides a welcome “patch” to the AMT for 2012 and subsequent years by increasing the exemption amount and allowing nonrefundable personal credits to the full amount of an individual’s regular tax and AMT. Additionally, there is now an annual inflation adjustment to the exemption amounts beginning in 2013.
- For 2012, the exemption amount is $50,600 for unmarried individuals; $78,750 for surviving spouses and married taxpayers filing jointly; and $39,375 for married taxpayers filing separately.
- The projected 2013 AMT exemption amounts are $51,900 for unmarried individuals; $80,750 for surviving spouses and married taxpayers filing jointly; and $40,375 for married taxpayers filing separately.
Consider this: Even though the AMT exemption has been permanently raised, it is still very important to plan the timing of your deductions and adjustments that effect AMT. For example, paying state income taxes in one year can provide a significant Federal deduction you may not be able to take in the following year when the actual state income taxes are due.
Reintroduction of the Pease Limitation
Named after former Congressman Donald Pease, the Pease limitation reduces the total amount of a higher-income taxpayer’s allowable itemized deductions such as charitable contributions, mortgage interest, and property taxes by three percent. However, the amount of itemized deductions is not reduced by more than 80 percent. The Pease limitation does not apply to investment interest, medical expense deductions, or losses from casualty, theft or gambling.
Consider this: Carefully plan the timing of income (stock options, bonuses, capital gains, etc.) and deductions to avoid the phase-out as much as possible. Begin by projecting at least two years of your individual income tax situation on a yearly basis.
Personal Exemption Phaseout
The personal exemption phaseout reduces personal exemptions for both taxpayers and their dependents by 2 percent for each $2,500 (or a portion thereof) that adjusted gross income (AGI) exceeds the threshold for relevant filing status. The applicable income threshold levels increased to:
- $300,000 for married couples and surviving spouses;
- $275,000 for head of households;
- $250,000 for unmarried taxpayers; and
- $150,000 for married taxpayers filing separately.
Federal Estate, Gift and GST Tax
Federal Estate Tax: The Act permanently provides for a maximum federal estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion for estates of decedents dying after December 31, 2012.
Consider this: Tax changes and life changes warrant a review of your estate plan. Contact your relationship manager and set up a meeting with our Wealth Advisory team to implement creative solutions that allow you to transfer wealth outside of your estate.
Gift Tax: The Act provides a 40 percent tax rate and a unified estate and gift tax exemption of $5 million (adjusted annually for inflation) for gifts made after 2012.
Consider this: Gifting assets out of your estate now and into trust(s) for the benefit of your children and grandchildren means that all future appreciation of the assets will also be free of estate tax and generation-skipping transfer tax.
GST Tax: The Act extends a number of GST tax-related provisions scheduled to expire after 2012. They include the GST deemed allocation and retroactive allocation provisions; clarification of valuation rules with respect to the determination of the inclusion ratio for GST tax purposes; provisions allowing for a qualified severance of a trust for purposes of the GST tax; and relief from the late GST allocations and elections.
Consider this: The GST provisions allows for greater flexibility in preserving assets for grandchildren and great-grandchildren. Please contact your relationship manager and set up a meeting with our Wealth Advisory team to implement strategies to take advantage of these favorable GST tax provisions.
Portability permits the estate of a decedent who is survived by a spouse to make a portability election that allows the surviving spouse to apply the decedent’s unused exclusion (the deceased spousal unused exclusion amount (DSUE)) to the surviving spouse’s own transfers during life and at death. The Act makes permanent portability between spouses.
Consider this: The Portability provision means that it is no longer necessary to equalize the amount of assets between spouses for estate tax minimization purposes.
For more information and strategies to help you offset the impact, please contact a member of our Wealth Advisory team at 303.531.8100
First Western Trust cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.