The American Taxpayer Relief Act (ATRA) of 2012 is limited resolution to the United States fiscal cliff by dealing with the expiration of certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (known together as the “Bush tax cuts”), which was temporarily extended in 2010. The American Taxpayer Relief Act gives permanence to the lower rate of much of the Bush tax cuts, while retaining the higher tax rate at upper income levels that became effective on January 1, 2012, as a result of the expiration of the Bush tax cuts. The American Taxpayer Relief Act also establishes caps on tax deductions and credits for those at upper income levels. Following the enactment this Act, there also seems to be a resounding need for estate planning due the permanency of provisions within the law.
The American Taxpayer Relief act states that for individuals with taxable income of $400,000 per year or less ($450,000 for a married couple on a joint tax return) the tax rates for income, capital gains, and dividends remained at their 2012 levels. For individuals with taxable income over the $400,000/$450,000 threshold the tax rate on income of 39.6% was retained; the tax rate on long-term capital gains of 20% was retained; and the tax rate on dividends was set to the capital-gains rate of 20%. Furthermore, a phase-out of tax deductions and credits for incomes over $250,000 for individuals and $300,000 for couples was reinstated. Furthermore, in the new law individuals will pay federal estate taxes of 40 percent if their estates are valued at above $5 million ($10 million for couples). All of the other transfer tax provisions from 2011 and 2012 are extended permanently. These include the lifetime gift exemption being the same as the death exemption, indexing of the exemption, and “portability” of the exemption between spouses which allows a surviving spouse to transfer the predeceasing spouse’s unused estate tax exemption amount to the surviving spouse. In all, the American Taxpayer Relief Act included $600 billion over ten years in new tax revenue, about one-fifth of the revenue that would have been raised had no legislation been passed.
For the tax year 2013, some taxpayers will experience the first year-to-year income-tax rate increase since 1993, although the rate increase came about not as a result of the 2012 Act, but as a result of the expiration of the Bush tax cuts. Assuming that we can rely on Congress’ promise the new rates for income, capital gains, estates, and the alternative minimum tax permanent are permanent, it will make estate and gift planning somewhat easier and long term planning more effective.
For further information about the effects of the American Taxpayer Relief Act and estate planning, please call the Evans Law Firm and talk to our estate planning attorney (415) 441-8669. Your initial consultation is free and confidential.