Fortunately, for families and individuals who felt threatened by the potential fiscal cliff drop in estate tax exemption from $5.12 million to $1 million, the 2013 reality is much better. Without Congressional action the estate tax exemption would have been reduced to $1 million and the rate would have risen to 55%. The actual increase was from 35% to 40%. Although the estate tax rate went up 5%, the $5.12 million exemption stayed the same and will continue to be graduated for inflation. Here is an overview of the fiscal cliff deal estate tax and other tax changes:
- Estate tax increase. Raised from 35%, the new 40% estate tax rate has an exemption of $5.12 million per person.
- Capital gains tax increase. Dividends and capital gains will be taxed at 23.8%. This rate includes the new 20% capital gains tax as well as the 3.8% surtax from the Affordable Care Act. (The surtax applies only to individuals with over $200,000, and married couples filing jointly with over $250,000, in modified adjusted gross income.)
- Income tax increase. Raised from 35%, the new 39.6% tax rate for high-income households will raise $620 billion in revenue. (The income tax applies to individuals earning $400,000 annually and married couples earning $450,000 annually.)
- Social Security tax increase. The payroll tax cut expired at the end of 2012 and was not extended in the new bill. Taxes are anticipated to rise 2%.
- Limited tax benefits. Individuals with incomes over $250,000 and married couples with incomes over $300,000 will be affected by the Personal Exemption Phaseout and the phaseout of itemized deductions.
- 5-year tax break extension for: Child Tax Credit, Earned Income Tax Credit, and the American Opportunity Tax Credit.
- 1-year tax break extension of 50% bonus depreciation.
- 1-year extension in unemployment benefits.
How did the bill get passed after the year-end deadline? The December 31, 2012 deadline was looming on politicians’ calendars, however the “real” deadline is January 3, 2013. Congress leaves office that day and the new Congress is sworn in at noon.
With the start of 2013 and the new tax rates established, it is an important time to review your current estate plan to make sure your assets are protected from tax liabilities. Check with your estate planning attorney to see if you need to make changes to your estate plan.