How the American Taxpayer
Relief Act Will Affect You

 Written by the American Academy of Estate Planning Attorneys
Compliments of Morris Hall

With the fiscal cliff looming, Congress passed the American Taxpayer Relief Act of 2012 on January 1, 2013. This law averts a number of the automatic tax increases set to take effect at the beginning of this year.

If you’re among the 77% of Americans who are affected by the end of the Payroll Tax Cut, you’ve likely noticed a slight decrease in your paycheck. The social security payroll tax returned to 6.2% this year; last year it was 4.2%.

Here, in a nutshell, are some of the other provisions the American Taxpayer Relief Act has in store for the public:

Income Taxes

Most Americans won’t see a difference in their income tax rates. For married couples who earn less than $450,000 annually (and single filers who earn less than $400,000), income tax rates will remain the same. Those who earn more than these threshold amounts will see their tax rate increase to 39.6%.

The same earnings thresholds apply to income taxes for capital gains and qualified dividends. Those below the thresholds will continue to pay tax at a rate of 15% for qualified dividend and capital gains income, while taxpayers who earn more than this will see their tax rate increase to 20% for these items.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a special tax adopted in the late 1960’s to ensure the very wealthy do not avoid taxes by accumulating too many credits and deductions. When the tax was originally adopted, Congress failed to index it to inflation, so each year lawmakers have had to pass a provision – a “patch” – increasing the exemption to keep middle class Americans from being subject to the AMT. This year, Congress increased the exemption from $50,600 to $78,750. It also went a step further, providing that in future years, the exemption will be indexed for inflation.

Estate and Gift Taxes

Congress voted to retain the $5 million federal estate tax exemption, adjusted for inflation. This means that for 2013, the estate tax exemption is $5.25 million for an individual and $10.5 million for a married couple. The top estate tax rate has been increased from 35% to 40%.

The gift tax and the estate tax remain unified, meaning that your lifetime gift tax use is subtracted from the total $5.25 million exemption amount remaining at your death. The gift tax also includes an annual exclusion amount – for 2013, the annual exclusion in $14,000. This means that you may give away up to $14,000 to as many different individuals as you choose without dipping into your lifetime exemption amount.

IRA Charitable Rollover

For a limited time – 2012 and 2013 only – Congress has extended the IRA charitable rollover provisions. This means that an individual over the age of 70 ½ can take funds from his or her IRA to make a charitable donation of up to $100,000 without that amount counting as income.

While the American Taxpayer Relief Act simplifies estate planning from an estate tax standpoint – at least for most Americans – it does not eliminate the need to plan.

You still need an estate plan to make sure your wishes are followed, to pass on your hard-earned wealth and protect your loved ones’ inheritances from lawsuits, divorce, long-term care expenses, guardianships, probate and other risks. An estate plan will also help your family navigate life’s transitions with minimal stress and conflict. One of Morris Hall’s experienced estate planning attorneys can help you put together a plan tailored to your goals and your family’s needs.