Articles Posted in Tax Laws

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The U.S. House of Representatives voted earlier this month to repeal the Federal Estate Tax. Republicans have long voiced their opposition over this tax but a vote to repeal hasn’t occurred in over a decade. The measure passed with 240 in favor and only 179 opposed. The vote breakdown was almost entirely on party lines with 7 Democrats joining Republicans in favor of repeal. However, there aren’t enough votes in the Senate and the President would likely veto the repeal so Estate Taxes aren’t going away anytime soon. However, this move sets up a potential repeal in the future especially if Republicans gain more seats in both houses of Congress and the Presidency in 2018.

As previously discussed here, the Estate Tax exclusion amount is currently $5,430,000 (and is indexed for inflation). So, if you die with less than that amount in your estate, you pay no estate taxes. The Tax Policy Center estimates that only 2 out of every 1,000 people who die pay any estate taxes. Most families won’t have to worry about this tax at all. The President’s Budget includes a provision lowering the exclusion amount to $3,500,000 which would open that tax liability for more individuals and families, but the vast majority of Americans would still be entirely unaffected by this tax. It will be very interesting to see what happens to the Estate Tax in the next few years.

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The IRS recently declared that same-sex married couples will enjoy the same tax treatment as straight couples beginning on September 16, 2013. This is an important decision since the practical realities of life post-DOMA were uncertain. Now, same-sex married persons can file joint returns, amend previous returns and request refunds for the past three years. Additionally, the IRS explained that it will recognize any legal marriage irrespective of the state of residence of the filers. This means that a gay couple in Kansas could travel to Washington and get legally married and this marriage would be recognized by the IRS. When the Kansas couple returns to their home state they must file as a married couple on their federal income tax returns. (They would not be able to file as a married couple for their state tax returns, however.)

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There are numerous tax and other important consequences of the Supreme Court’s decision to overturn the Defense of Marriage Act (DOMA). Also, estate planning for same-sex married couples will be easier and less cumbersome than ever before. Some of the effects of the recent decision are discussed below.

“Married” Filing Status for Federal Income Taxes

Same-sex married couples will now file their annual federal income taxes as married, either jointly or separately. Tax preparation should be less expensive and simpler than under DOMA. Married same-sex couples will no longer have to decide which spouse takes which deduction or who claims which dependent child.

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We didn’t fall off the fiscal cliff. In the wee hours of January 1, 2013 Congress finally reached a deal on taxes. The American Taxpayer Relief Act (ATRA) outlines the changes to taxes in 2013. The new laws are similar to those in existence in 2012 with some slight modifications.

Ordinary Income Taxes

Tax rates are 10%, 15%, 25%, 28%, 33%, 35% and an additional 39.6% was added in 2013. This new tax bracket will be assessed for incomes >$400,000 for single filers and $450,000 if married filing jointly.

Qualified Dividends/Long-Term Capital Gains
0%, 15% and a new 20% bracket was added for incomes >$400,000 for single filers and $450,000 if married filing jointly.

Medicare Tax on Net Investment Income
This is a brand new tax of 3.8% for modified adjusted gross incomes >$200,000 for single filers and $250,000 if married filing jointly.

Social Security Payroll Reduction
The 2% reduction enjoyed for the past two years expired January 1, 2013.

Estate/Gift/GST Taxes

40% for Estates/Gift/Generation Skipping Transfers over $5,000,000 adjusted for inflation. (Adjusted amount for 2013 is $5,250,000).
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Our Palm Desert Estate Planning lawyers see too many clients fail to timely update their estate plan. Since Congress has not given us any idea if they will address the tax laws before January 1, 2013, our lawyers are planning for Estate Tax Armageddon. As we have previously posted, the laws for gift and estate taxes are changing at 12:01 A.M. on January 1, 2013 unless Congress passes new legislation. Unfortunately, this means there is only eight more weeks to schedule an appointment with your estate planning attorney to revise your documents.

Engaging in last-minute estate planning can be sloppy and dangerous. Numerous issues can arise having very costly consequences if you don’t timely review and revise your plan. If you’re interested in taking advantage of the life-time gift exemption of $5.1 million, make sure your gift is completed before January 1, 2013. This doesn’t mean you can hand a check to your child and hope that he or she cashes it before New Year’s Day. A safer method is to do a wire transfer that ensures the funds are deposited fully before January 1st. If you’re gifting real property, make sure the deed is signed AND recorded before January 1, 2013.

Don’t miss out on these valuable opportunities by waiting until the last minute to address your estate planning problems. Schedule an appointment with your attorney early so that you have enough time to review, revise and execute new documents before New Year’s Eve.

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The current estate tax laws are likely to revert to pre-EXTRA levels beginning on January 1, 2013. This means that the estate taxes will be levied at estates over $1,000,000 with a tax rate of up to 55%. Considering the value of real property, life insurance and retirement accounts many individuals may find themselves included in the estate tax bracket. However, 2012 has historically low tax rates and historically high exemptions which allows for creative and unique planning before January 1, 2013.

GIFTING

The current lifetime gift exemption is $5,000,000. The annual exclusion amount is currently at $13,000 but an individual can give up to $5,000,000 during life tax free. This gift exemption is scheduled to go back to $1,000,000 as well in 2013. Therefore, 2012 is a great year for making lifetime gifts.

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The tax law changes enacted in 2010 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act made significant changes to estate and gift tax laws for 2011 and 2012. However, these changes will expire at year’s end barring an act from our legislators on Capitol Hill. Estate planning attorneys and their clients find themselves in the same predicament they experienced at the end of 2010. Back then, it appeared that exemption amounts would decrease to pre-2000 levels beginning on January 1, 2011. Again, if Congress fails to act (and because this is a presidential election year such a fear is warranted) the estate and gift tax world will resemble that of 1999.

Important Changes for 2013

ESTATE TAX EXEMPTION
The estate and gift tax exemption is $5,120,000 for 2012, but will decrease to $1,000,000 in 2013.

GENERATION-SKIPPING TRANSFER TAX

The GST tax is currently $5,120,000 but will decrease to approximately $1,390,000 in 2013
TAX RATES
Estate, gift and GST tax rates are capped at 35% in 2012 but will increase to 55% in 2013
PORTABILITY
Estate tax exemptions were made portable in 2011-2012. This means that one spouse can port his or her unused exemption amounts to the other spouse on the first spouse’s death. This portability option will expire in 2013.

The uncertainty of the next six months is a valuable time for creative estate planning and gifting opportunities. Many clients with substantial wealth may find outright gifts very attractive. They can transfer some of their wealth during life and enjoy the lower tax rates and higher exemption amounts available for 2012. Additionally, many estate plans should be reviewed to ensure that there are no unintended tax consequences under the new law.
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Some states are better than others for decedents dying in the year 2012. Although California boasts a relatively high income and sales tax, it is actually a great place to die for tax purposes. As a way of background, it is important to understand some different terms. An estate tax is a tax paid by the estate of a decedent. An inheritance tax is paid by heirs who receive a distribution from an estate. The Federal estate tax exemption is currently set at $5 million indexed for inflation. There is no federal inheritance tax.

The California estate tax was phased out in 2005 and heirs have not paid an inheritance tax since 1982. However, Washington D.C. and 22 other states do impose an inheritance or state estate tax. Most of the states that impose the estate tax exempt around $1 million per estate with the highest tax rate at 16%. Kentucky and five other states impose only an inheritance tax. Pennsylvania, for example, imposes an inheritance tax of 4.5%-15% on money left to anyone other than a spouse. New Jersey and Maryland impose both taxes. New Jersey imposes an estate tax of up to 16% with the lowest state estate exemption of $675,000. New Jersey also imposes an inheritance tax from 11-16% on money left to nieces, nephews or friends but no inheritance tax on money left to parents, siblings, children or grandchildren.

Coinciding with federal changes in estate tax law, many states revamped their laws regarding estate taxes in 2011. Ohio abolished their estate tax effective January 1, 2013 while Illinois brought back its estate tax for decedents dying in 2011 and after. Connecticut lowered the exemption amount from $3.5 million to $2 million per estate. North Carolina, Rhode Island, Vermont and Maine all raised their exemption amounts.

Estate taxes continue to raise numerous questions and concerns for families today. However, California residents have far less concerns since we have a more favorable tax system for decedent estates.
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The IRS released the final version of Form 8939: Allocation of Increase in Basis for Property Acquired from a Decedent. This is the form necessary to elect out of estate taxes for decedents who died in 2010. The form was originally due November 15, 2011 but because of delays and ambiguities in the form it is now due January 17, 2012. The IRS released Notice 2011-76 setting the new deadline and giving some guidance on the form’s application.

Even though the thought of paying no estate taxes seems like a great idea, personal representatives and trustees need to meet with their attorneys and CPAs before making this election. The increase in basis of assets held by a decedent may not actually outweigh the benefit of paying no estate taxes. For more information on this form and its implications check out our previous article here.

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After a long-awaited delay, the IRS finally issued some guidance on August 5, 2011 with respect to the filing of the new Form 8939. Notice 2011-66 describes how administrators can opt-of estate taxes for decedents who died in 2010 using Form 8939. Revenue Procedure 2011-41 outlines the tax rules that apply to these “opted out” estates.

Last December, Congress finally approved a new law on estate taxes. This law set the exemption at $5,000,000 and the tax rate at 35%. The law was also made retroactive to January 1, 2010 but allowed for an intriguing twist. If someone died in 2010, the administrator had two choices. They could operate under the old law where there were no estate taxes. Or, they could use the tax rules of the new law. Opting out of estate taxes has a potential disadvantage of also opting out of stepped-up basis rules and opting into modified carryover basis rules. However, opting out also means no estate tax is due no matter how large the estate.

To elect to use the old 2010 provisions with no estate tax, administrators must file the new Form 8939 no later than November 15, 2011. The IRS will not grant extensions to file this form and will only accept late-filed forms under very limited circumstances. To elect to use the new tax laws for 2010 decedents, administrators must file the traditional Estate Tax Return Form 706 by September 19, 2011.

The IRS believes that “7,000 executors of estate who died in 2010 will… [opt out of estate taxes] and thus will be required to file Form 8939, and that it will take approximately 8 hours to prepare.” Although Form 8939 is due in three months, as of August 10, 2011, the IRS has yet to release the final form or any instructions.
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