Estate Planning & the Fiscal Cliff:
What to expect if Congress and the White House do not reach a compromise.
If you have been avidly following the fiscal cliff conversation between Congress and the White House, you will have realized that it is quite probable, even possible, that there will be no action taken to remedy this situation. The hope, of course, is that a workable compromise will be reached between Congress and the White House which will stave off an economic “catastrophe” as it has been dubbed by the media.
In the event that 2013 dawns with no solution, you should have a general understanding of how this will affect your taxes generally, and your estate planning specifically.
First, many American households will see a rise in their tax liability in 2013. This rise will come from a few areas:
- A Net Investment Income surtax of 3.8% will be levied against taxpayers with modified adjusted gross incomes (MAGI) above $200,000 for single filers and $250,000 for married filers. Net investment income is classified as gross income derived from annuities, interest, rents, royalties, dividends and net gain from the sale of property, reduced by deductions attributable to the production of such income.
- The income tax table will feature an overhaul of the tax brackets with an elimination of the 10% tax bracket and an introduction of a 39.6% effective tax rate on the highest earners. More middle income joint filers will end up in the 28% tax bracket thereby increasing the “marriage penalty” for many taxpayers.
|Tax Bracket||Married Filing Jointly||Single|
|10%||$0- $17,400||$0- $8,700|
|15%||$17,400- $70, 700||$8,700-$35,350|
|35%||Over $388,350||Over $388,350|
|Tax Bracket||Married Filing Jointly||Single|
|28%||$70,700- $142, 700||$35,350-$85,650|
|39.6%||Over $388,350||Over $388,350|
- The Capital Gains Tax Rate will increase to 20% for affluent and high net worth taxpayers, from its current rate of 15%.
- The Qualified Dividend Rate will also increase from its current rate of 15% to be equal to the taxpayer’s ordinary income tax rate.
- The Personal Exemption currently available for taxpayers, their spouse and dependents ($3,800 in 2012) will be phased out for taxpayers with adjusted gross incomes (AGI) over a designated threshold. The phase-out was last applied in 2009.
- The Itemized Deduction limits will be reduced by 3% of the excess of AGI over an inflation adjusted threshold amount.
- The Employee Portion of Hospital Insurance (Medicare Part A) will increase to 2.35% on taxpayers with MAGIs above $200,000 for single filers and $250,000 for married filers. The current rate is 1.45 percent.
- Self-Employed Hospital Insurance (Medicare Part A) will increase to 3.8%. The current rate is 2.9 percent. Self-employed individuals will not lose their ability to deduct one-half of self-employment taxes in arriving at the AGI.
- Taxpayers will also see an increase in these two areas:
- FICA (Social Security) Tax Employee Share from 4.2% to 6.2 percent
- Self-Employment Tax from 10.4 percent to 12.4 percent
- The AGI floor for the deductibility of medical expenses when itemizing your deductions will increase from 7.5% to 10% which means that less of those medical expenses will be deductible.
- And finally, in the world of Gift and Estate taxes, the gift and estate tax rates will increase from a maximum marginal rate of 35% to a maximum marginal rate of 55%. Also, the exemption amounts for both gift and estate taxes will be reduced from $5.12 million to $1 million.
The Effect of These Changes on Your Estate Planning
The reduction in the exemption amount for estate and gift taxes will see more taxpayers being subject to these taxes. If you live in California, own a home and have some savings, life insurance policy and a few investments and/or retirement accounts, you can quickly see you estate being subject to the estate tax. Additionally, at a maximum marginal tax rate, more of your estate will be paid to taxes, reducing the amount that your family inherits.
The overriding idea of estate planning is to ensure that your loved ones can inherit as much of your legacy as they can, while eliminating or reducing the tax burden. A combination of the reduction of the exemption and the increase in the tax rate serves to frustrate that idea.
If you are concerned with the effectiveness of your current estate plan or do not currently have an estate plan but would like to safeguard your estate against the arbitrariness of Congress, do not hesitate to call our office in the New Year for a free initial consultation.
Happy Holidays to you and your family. Wishing you a prosperous 2013!