THE NEW TAX LAW – What it means to You
By Douglas G. Goldberg, Esq., Colorado Springs LIVING WELL Magazine
On December 17, 2010, Congress passed, and President Obama signed, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”). This article provides a brief summary of the Act in the areas of income, estate, gift and generation skipping taxes.
Without any Congressional action, the so-called “Bush Tax Cuts,” would have expired on December 31, 2010 and we would have gone back to 2001 law. Because of the approach of the midterm elections, the Act became the product of a compromise reached in the eleventh hour and has not been wildly embraced by either the White House or by either party. Instead, it is simply regarded as the best “deal” that could be made under the circumstances.
INCOME AND CAPITAL GAINS TAXES
For the next two years, the six individual income tax brackets ranging from 10 to 35% will remain in place. The top income tax rates on dividends and long-term capital gains also stay at 15%. For those with dividends and long-term capital gains taxed in the lowest two tax brackets, the tax rate remains at zero percent.
In 2013, individual ordinary income tax rates are scheduled to return to their 2001 levels – five brackets with rates of 15, 28, 31, 36, and 39.6%. Similarly, tax rates on investment income will return to their pre-2003 rates; long-term capital gain rates will increase to 10 and 20% and dividends will be taxed as ordinary income with a top rate of 39.6%.
ESTATE, GIFT AND GENERATION SKIPPING TAX
The estate tax now has an exemption of $5 million per person and a top rate of 35% retroactive from the beginning of 2010 through 2012. The exemption is indexed for inflation, beginning in 2012. The carryover basis rules that have applied during 2010 are retroactively repealed. Instead, assets passed on to estate beneficiaries generally will qualify for a full “step up in basis” to fair market value.
The lifetime gift tax credit has long been $1 million, meaning that anyone can give away up to $1 million during his or her lifetime without incurring a gift tax. Beginning in 2011, individuals have a lifetime gift tax exemption that matches the estate tax exemption for a total of $5 million with a maximum tax rate of 35%.
This dramatic increase in the lifetime gift tax exemption has created some fantastic opportunities for tax-efficient lifetime transfers to pass assets tax-free to future generations.
Starting in 2011, a spouse who dies with an estate less than $5 million will be able to transfer the unused portion of their exemption to a surviving spouse. This allows a married couple to transfer $10 million tax-free without regard to the order of death or how assets are owned. But please don’t be lulled into thinking that this good result is forever. The only thing more certain than death and taxes is that Congress will change their collective mind…again and again. Therefore, you should absolutely not rely on this exemption portability as part of your planning because of uncertainty in the tax laws after 2012. Besides its ambiguous future and a required filing of an estate tax return, it does not consider other common planning issues, such as remarriage protection, asset control and creditor protection. Additionally, while the estate tax exemption is portable, the Generation Skipping Tax exemption is not, so it may not be a fit for individuals who desire to incorporate multi-generational legacy planning.
While the Act does not provide long-term certainty, it does provide some clarity and offers several significant planning opportunities for the next two years. But you should not wait! Congress must address all of these issues once again in 2012. Otherwise, we revert to the 2001 law.
Other looming changes that will further complicate matters down the road are the scheduled tax increases for certain individuals that were enacted as part of Patient Protection and Affordable Care Act (“ObamaCare”) earlier this year. Additionally, the 3.8% surtax on investment income as well as the 0.9% increase in the employee portion of the hospital insurance wage base are both set to become effective beginning in 2013.
If you haven’t had your estate plan reviewed in the last two years, DO NOT WAIT ANY LONGER. CALL US. WE CAN HELP YOU figure what, if anything, you need to do to take full advantage of the current laws. Reach us at 719-444-0300.