Tuesday, October 23, 2012

Year End Tax Planning

As we have discussed in our prior newsletters, and as summarized in numerous news articles about the impending "fiscal cliff," important tax changes will occur January 1, 2013 unless Congress takes action
$5,120,000 Gift and Estate Tax Exemption Ends
. In 2012, each U.S. citizen and resident has a $5,120,000 gift and estate tax exemption. In 2013, that exemption will be $1 million unless Congress acts. If one makes a $5 million gift (assuming no prior taxable gifts) in 2012, no gift tax would be due, but that gift will be taken into account in computing the estate tax at the donor’s death. If the exemption had decreased, estate tax would be due. However, such a gift will be effective to remove all future income and appreciation on the gifted assets from the donor’s estate. We had suggested that clients may want to consider the creation of a "Lifetime Credit Shelter Trust" that could benefit the donor’s spouse and children. If each spouse wants to create such a trust for the benefit of each other, they must be careful to avoid the "Reciprocal Trust Rule" because if the rule were applied and a donor is deemed to create a trust for the donor’s benefit, all of the trust property would be included in the donor’s estate under Code §2036(a). Usually, in order to avoid the Reciprocal Trust Rule when both spouses create an irrevocable life insurance trust, we have recommended creating the two trusts at least six months apart. That is no longer possible at this late date in 2012. It would still be possible for one spouse to create an irrevocable trust for the benefit of spouse and descendants, and the other spouse to create an irrevocable trust only for the benefit of the descendants. IF YOU WANT US TO WORK WITH YOU TO CREATE SUCH A TRUST, YOU MUST CONTACT US BY NOVEMBER 15, 2012. Preparing the trust agreement(s) with the desired terms and obtaining necessary appraisals of the gifted assets require time. DO NOT WAIT UNTIL THE HOLIDAYS TO CONTACT US.
Generation-Skipping Transfer Tax Exemption
. If Congress fails to act, the GST exemption will be $1,430,000 based upon increases for inflation from 2001. The tax rate will be 55% (the 2013 top estate tax rate), up from 35% in 2012.
Increase in Capital Gains tax rates
. In 2012, the tax rate on capital gains is 15%. In 2013, if Congress fails to act, the maximum long-term capital gain rate will be 18% on assets held more than five years and 20% on assets held less than five years, but more than one year.
Increase in tax rate on dividends
. In 2012, qualified dividends are taxed at a 15% rate. In 2013, if Congress fails to act, all dividends will be taxed as ordinary income. Because dividends are taxed in 2012 at the same rate as long-term capital gains, it was not important whether a distribution from a corporation was characterized as a dividend or a redemption. That distinction will again become important when the rates are different.
Increase in tax rates generally
. The Bush tax cuts will expire at the end of 2012. The tax rates under the 2001 Act ranged from 10% to 35%. In 2013, if Congress fails to act, the rates will range from 15% to 39.6%.
3.8% surtax on investment income
. In addition, starting in 2013, a 3.8% surtax will apply to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount: $250,000 for joint filers, $125,000 for married filing separately and $200,000 for other taxpayers. For estates and trusts, the tax is 3.8% of the lesser of (1) undistributed net investment income or (2) the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins (Only $11,650 in 2012).
Annual Exclusion Gifts
. For some good news, the gift tax annual exclusion that is $13,000 per donee in 2012 is expected to increase to $14,000 per donee in 2013. DON’T WAIT TO MAKE YOUR ANNUAL EXCLUSION GIFTS FOR 2012. Go ahead and make them now, and then make your 2013 annual exclusion gifts in January.
Estate Tax Statistics
. As reported by Jonathan Blattmachr to the ACTEC listserv, 4,600 estate tax returns were filed in 2011, down nearly 70% from 2010, which was down 55% from 2009. Net estate tax receipts was $3 billion in 2011, down from $13 billion for 2010 and $20+ billion for 2009.