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Estate Tax Likely to Remain (Mostly) Unchanged

January 2, 2013 – With the “fiscal cliff” looming, estate planners and tax attorneys were left wondering what to do to take advantage of historically tax-friendly Estate Tax laws. The answer may have been to do nothing different.

Under 2012 tax law, the Estate Tax only applied to individuals dying with more than $5 million of net worth ($10 million for married couples). As with many tax laws, the rules were set to drastically change on January 1, 2013. Without an act of Congress, the Estate Tax exemption was set to go from $5 million to $1 million and the top Estate Tax rate was scheduled to increase from 35% to 55%. It is easy to see why many tax professionals were in a panic to find answers for their wealthier clients.

But all the panic looks to have been for naught. A Bill passed by both the Senate and House last night looks to retain the $5 million Estate Tax exemption and continues the idea of “portability”, which is a provision in the law that allows a surviving spouse to use any unused portion of their deceased spouse’s exemption (this really gives a married couple a $10 million Estate Tax exemption even if they do not have proper estate planning in place). The Estate Tax rate looks to be increased but by a much more modest amount, with the top rate to increase from 35% to 40% (as opposed to 55%).

We have not had a chance to look at the entire Bill as of yet but some of the other tax related provisions appear to include:

  • An extension of the 15% income tax rate on dividends and long term capital gains for those under certain income thresholds ($400,000 – $450,000 of income)
  • An Alternative Minimum Tax (AMT) “patch” that will prevent an estimated 30 million taxpayers from being subject to AMT for the first time
  • An extension of “Bonus Depreciation” provisions that allow businesses to immediately deduct up to 50% of new equipment purchases
  • An extension of several individual income tax credits or higher dollar amounts on those credits (Child Tax Credit, Tuition Credit, Earned Income Credit)
  • The Bill does not appear to extend the “Payroll Tax Holiday” that brought the employee portion of Social Security down from 6.2% to 4.2% for the past few years – so expect to see less in your paycheck starting as of today.