The changes to estate taxes in 2013 finally bring a degree of confidence going forward for the personal households and small business owners affected by this component of the tax code. They can now plan their and retirement without the uncertainty that has epitomize estate tax planning for the past decade in the form increasing tax rates and rising complexity.
Sent by the U.S. Senate to the House of Representatives on New Year’s Eve, lawmakers enacted new rules for estate taxes on January 1 as part of the American Taxpayer Relief Act (ATRA) of 2012.
Generous permanent exclusion
The permanent rules— at least until Congressional action change it— allow a person to exclude $5.25 million from estate taxes in 2013. The effective tax rate was reduced to 40%. Many taxpayers, including homeowners in high value real estate markets like San Francisco, New York and Boston breathe a sign of collective relief upon the passage of ATRA.
Failure by lawmakers to resolve the fiscal cliff would have caused the exclusion to revert to $1 million per individual and a tax rate of 55% tax—a serious deal for homeowner in high value real estate markets like San Francisco, New York, and Boston.
The exclusion amount would have reverted back to $1 million per individual.
Under the regulations, with effective estate planning, a married couple can exclude a total of $10.5 million. Consequently, the tax affects very few households. The exclusion amount includes all gifts bestow during the taxpayer’s lifetime.
An individual or married couple can use the combined tax/gift tax exclusion to transfer assets as part of their estate or as gifts to heirs for the beneficiary’s own gain—in either manner or a combination of the two. When making gifts, document all transactions to ensure you have the necessary support when you or your estate file your tax returns.
The Tax Policy Center estimates that as many as 3,800 estates will have large enough assets to pay estate taxes in 2013.
At the end of 2012, with the likelihood of a last-minute agreement in Congress see seemingly less likely, many wealthy individuals accelerated plans through gifting and other strategies to protect their wealth not knowing what would happen the following tax year.
Some taxpayers gave away the money or opened trusts with quick cash transfers. Those individuals can now pull that money out of trusts and invest in equities or other assets.
According to estate and gift tax rules, an individual can give up to $14,000 per person, tax-free and up from the $13,000 allowed in 2012. This outlay does not count towards the $5.25 million estate taxes exclusion.
This gift allowance can add up significantly. For example, a couple with three adult married children can give $42,000 this year, plus $42,000 to each spouse for a total of $84,000. It is makes an excellent strategy for funding a 529 college savings plan.