Tax Act of 2012

Now that the dust has settled and I have just returned from a week long national conference on the latest tax planning techniques, I thought it would be appropriate to circulate a brief summary of the “fiscal cliff saving” tax law recently signed by the President.
The American Taxpayer Relief Act of 2012 allows tax rates to rise on the nation's highest earners while also extending dozens of tax cuts for individuals and businesses.  It also permanently extended the $5,000,000 (adjusted for inflation) federal estate tax exclusion that applied to deaths in 2011 and 2012. 
Specifically, the bill:

• Raises the top income tax rate to 39.6% for married couples earning $450,000 and single taxpayers earning $400,000. These amounts will be indexed for inflation.
• Raises long-term capital gains and qualifying dividends tax rate to 20% (from 15%) for taxpayers in the 39.6% tax bracket for regular and alternative minimum tax.
• Permanently extends Bush-era tax cuts from 2001 and 2003 for all other taxpayers.
• Reinstates the phase-out of personal exemptions and the overall limitation on itemized deductions for married couples filing jointly earning over $300,000 and single taxpayers earning over $250,000.
• Permanently extends the alternative minimum tax exemption amount and increases it for inflation going forward.
• Extends through 2013 the following individual tax benefits: above the line deduction for teacher expenses, relief from cancellation of debt income for principal residences, parity for employer-provided mass transit benefits, deduction for mortgage insurance premiums as interest, election to deduct state and local sales taxes in lieu of income taxes, above the line deduction for qualified education expenses, tax-free distributions from IRA accounts for charitable purposes.
• Extends through 2013 certain business tax provisions that expired at the end of 2011 including: the research credit, the new markets tax credit, railroad track maintenance credit, mine rescue team training credit, work opportunity credit, the Section 179 asset expensing at $500,000, Section 1202 stock exclusion at 100%, and empowerment zone incentives.
• Extends 50% bonus depreciation through 2013.
• Extends through 2013 certain energy tax incentives that expired at the end of 2011 including: energy efficient credit for existing homes, alternative fuel vehicle refueling property credit, biodiesel and renewable diesel incentives, wind credit, energy efficient credit for new homes, and credit for manufacture of energy efficient appliances.
• Makes permanent the unification of the estate, gift, and generation-skipping tax rate structure.  Thus, the unified federal estate and lifetime gift tax exclusion amount — the total amount a taxpayer may transfer during his lifetime and at death without incurring estate, gift or generation-skipping taxes — is $5,000,000, adjusted for inflation after 2011. The 2013 amount is $5,250,000.  Transfers exceeding the exclusion are subject to a graduated tax regime with a 40% maximum rate.  Please keep in mind that the New York’s estate tax exemption amount is $1,000,000.  The New York estate tax rate on a taxable estate that exceeds this amount starts at about 6% and rises to 16%.  The Connecticut estate tax exemption amount is $2,000,000.  The Connecticut estate tax rate on a taxable estate that exceeds this amount also ranges from about 6% to 16%.  Careful planning is required to be sure that estate plans give surviving family members the flexibility to minimize the aggregate federal and state estate taxes.
• Sets the federal income tax rates that apply to estates and trusts at 15%, 25%, 28%, 33% and 39.6%.
• Makes permanent the so-called “portability” provision.  If a spouse dies without exhausting his or her federal estate and lifetime gift tax exclusion amount, the surviving spouse may use the decedent’s unused amount (hence the name, meaning that the unused amount is portable to the surviving spouse).  It is important to note that portability does not apply to gifts given to grandchildren, i.e., generation-skipping transfers, and it does not apply for New York or Connecticut estate tax purposes.
• Makes permanent the federal estate tax deduction for state estate taxes.

Please contact me if you have any questions.  If your estate plan has not been reviewed recently, I suggest you contact me.