New Tax Bill Passed!

The American Taxpayer Relief Act was passed in the first days of 2013 to avoid raising taxes on all taxpayers. The Act: (1) extends the 2012 income tax rates for persons earning less than $400,000, or $450,000 for joint filers; (2) for these same filers, the capital gains and dividends rate will increase from 15% to 20%, but stay at 15% for other taxpayers; (3) estate, gift and GST exemptions stay at $5 million (indexed for inflation) but the top rate is increased from 35% to 40%; (4) makes "permanent" the portability of a deceased spouse’s unused exemption to the surviving spouse; and (5) makes "permanent" the alternative minimum tax relief and indexes it for inflation.

Another Appeals Court Strikes Down DOMA

The Second Circuit in Edith Schlain Windsor v. U.S. (CA 2 10/18/2012) Docket No. 12-2335-cv(L), held that a surviving spouse in a legally married same sex couple is entitled to the federal estate tax marital deduction, and therefore a refund of estate taxes paid. The Court struck down the Defense of Marriage Act (DOMA) that prohibits the federal government from recognizing legally married same sex couples for federal benefit purposes. A few other courts this year have also found DOMA to be unconstitutional, but some court watchers believe that this is the case that the U.S. Supreme Court may accept for review. One reason is that Justice Elena Kagan may have had to recuse herself from the other cases, but she was not involved in this one when she was White House counsel.

Federal Law News Flash!

On June 15, 2012, Treasury issued temporary and proposed regulations which give clarity and guidance as to the application, use and limitations on the portability of the unused estate tax exemption of the first spouse to die. In particular, the IRS clarified how the portable amount of estate tax exemption is calculated, and how that amount can be used by the surviving spouse, both for lifetime gifts as well as at death. Treasury calculates the surviving spouse’s exemption in a way that is favorable to taxpayers: The first spouse’s unused exemption (calculated in the year of death and pursuant to a timely filed U.S. Estate Tax Return) is added to the surviving spouse’s exemption. This means that if the first spouse dies in 2012 with $5 million in unused exemption; his estate timely files a Form 706; and surviving spouse dies in 2013 with a $1 million exemption because of the change in federal law, the surviving spouse’s estate will have a $6 million total exemption. Earlier, commentators had interpreted the statute as limiting the surviving spouse’s total exemption to two times the exemption available at the survivor’s death (or a total of $2 million in the example described above). This favorable interpretation makes it even more important to consider filing a Form 706 at the first death.

2011 Decedents and "Portability"

If a 2011 decedent is the first spouse to die, then in order for the surviving spouse to potentially double the estate tax exemption that will be available at his or her later death, under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) “portability” of the deceased spouse’s unused estate tax exemption must be elected on a timely filed U.S. Estate Tax Return (Form 706).  A draft of the 2011 Form 706 was released by the IRS on August 26, 2011, but does not seem to include a place to elect portability.  You may want to file a Form 4768 by the due date of the Form 706 (usually 9 months after date of death) to request an automatic 6-month extension and perhaps by then the manner of electing portability will be clear. See our January 2011 newsletter for a more complete discussion of this Act.