Shockingly, and in the “final hour,” Congress actually acted and prevented us from falling off the “fiscal cliff.” The act they implemented has sweeping changes to our taxes. The purpose of this article is to simply summarize some of the changes brought about due to the Taxpayer Relief Act.
Tax rates: The Bush tax brackets of 10%, 15%, 25%, 28%, 33%, and 35% will remain the same and are made permanent. This means that most Americans will see no change in their tax rates. For households making $400,000 a year (single) and $450,000 a year (joint filers and qualified widow(er)s) there will be a new 39.6% tax rate. These dollar amounts will be adjusted for inflation after the 2013 tax year.
Estate Tax: The new Act permanently keeps the estate tax exemption amount at $5,000,000 (as indexed for inflation). It also increased the top tax rate from 35% in 2012 to 40% in 2013 and beyond. The Act also continues portability which allows the estate of the first deceased spouse to transfer his or her unused estate tax exclusion to the surviving spouse.
It is important to understand that simply because that Estate Tax exemption amount is at $5,000,000 it is just as important now as ever before that you have the proper estate planning documents in place. One of the reasons to create an estate plan is to minimize the taxes that will be owed to the government, but that is only one of the reasons. Besides avoiding estate taxes, a proper estate plan will also avoid the costs and delays of probate, offer creditor protection to a surviving spouse and children, offer divorce protection to a surviving spouse and children, and ensure that your hard earned money goes to who you want, when you want, and how you want with the least amount of expense and delay and the greatest amount of privacy.