Fiscal Cliff Crisis Avoided? Estate Taxes in 2013
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In 2012, with the dreaded “Fiscal Cliff” looming, many were worried about the inaction that would cause the estate tax exemption level to fall to $1 million. However, in the first two days of the new year, Congress finally passed the American Taxpayer Relief Act of 2012 (ATRA) which makes permanent the $5 million exemption as well as portability.
Exemption Stays at $5 Million
As previously stated, the estate tax exemption was supposed to fall to $5 million to $1 million per person on January 1, 2013. However, ATRA extends 2012’s exemption of $5 million, adjusted for inflation. While the IRS has not indicated the exact calculation, most anticipate that it will be calculated at a $5.25 million exemption per individual (or a $10.5 million exemption per household).
Exemption Is Still Portable
ATRA kept portability of the exemption between spouses. Portability means that when one spouse passes, the surviving spouse can use the deceased spouse’s estate tax exemption. However, a bypass trust is still an extremely useful tool for people to consider, even if you do not believe that you would surpass the exemption at this time. Additionally, do not forget that you must elect portability—the IRS is not going to simply offer you a $5 million exemption.
The Compromise – The Tax Rates Will Rise
While the $5 million exemption excludes many more estates from paying estate tax than the projected $1 million exemption would, those that do have an estate above $5 million will be taxed at a higher rate. In 2012, any amount in the estate above $5,120,000 (the $5 million exemption adjusted for inflation) would be taxed at 35%. However, ATRA increases the amount to a 40% tax rate. This rate is a compromise between the 45% rate that President Obama sought and the 35% tax rate that was in effect for years 2011 and 2012.
Permanence
ATRA made these estate tax provisions permanent. However, as everything with Congress, this can simply be changed by another bill.
IRS Circular 230 Disclosure: Internal Revenue Service regulations generally provide that, for the purpose of avoiding federal tax penalties, a taxpayer may rely only on formal written advice meeting specific requirements. The tax advice in this document does not meet those requirements. Accordingly, the tax advice was not intended or written to be used, and it cannot be used, for the purpose of avoiding federal tax penalties which may be imposed.
IRC Sections 6662 Disclosure:The Internal Revenue Code imposes substantial “accuracy-related” penalties on taxpayers for positions taken on a tax return that result in a substantial understatement of liability for tax. Taxpayers may avoid such penalties by adequately disclosing positions that are not based on “substantial authority” in accordance with the methods described under Treasury Regulations section 1.6662-4(f).
ABOUT THE AUTHOR: By: Christina M. Heischmidt, Attorney at DunlapWeaver PLLC
Christina is an attorney at DunlapWeaver PLLC practicing in Virginia and the District of Columbia. Her areas of practice focuses primarily on civil litigation in the areas of commercial, business and bankruptcy law. She also specializes in comprehensive estate planning and corporate transactional law. She was named to Virginia Business’s 2012 Legal Elite in Taxes/Estates/Trusts/Elder Law. Christina is active in numerous organizations including the Fairfax Bar Association’s Young Lawyers Section and the Trusts and Estates Section, the Northern Virginia Bankruptcy Bar Association, McLean Estate Planning Council, and a local women’s golf/networking group.
Copyright DunlapWeaver, PLLC
More information about DunlapWeaver, PLLC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
As previously stated, the estate tax exemption was supposed to fall to $5 million to $1 million per person on January 1, 2013. However, ATRA extends 2012’s exemption of $5 million, adjusted for inflation. While the IRS has not indicated the exact calculation, most anticipate that it will be calculated at a $5.25 million exemption per individual (or a $10.5 million exemption per household).
Exemption Is Still Portable
ATRA kept portability of the exemption between spouses. Portability means that when one spouse passes, the surviving spouse can use the deceased spouse’s estate tax exemption. However, a bypass trust is still an extremely useful tool for people to consider, even if you do not believe that you would surpass the exemption at this time. Additionally, do not forget that you must elect portability—the IRS is not going to simply offer you a $5 million exemption.
The Compromise – The Tax Rates Will Rise
While the $5 million exemption excludes many more estates from paying estate tax than the projected $1 million exemption would, those that do have an estate above $5 million will be taxed at a higher rate. In 2012, any amount in the estate above $5,120,000 (the $5 million exemption adjusted for inflation) would be taxed at 35%. However, ATRA increases the amount to a 40% tax rate. This rate is a compromise between the 45% rate that President Obama sought and the 35% tax rate that was in effect for years 2011 and 2012.
Permanence
ATRA made these estate tax provisions permanent. However, as everything with Congress, this can simply be changed by another bill.
IRS Circular 230 Disclosure: Internal Revenue Service regulations generally provide that, for the purpose of avoiding federal tax penalties, a taxpayer may rely only on formal written advice meeting specific requirements. The tax advice in this document does not meet those requirements. Accordingly, the tax advice was not intended or written to be used, and it cannot be used, for the purpose of avoiding federal tax penalties which may be imposed.
IRC Sections 6662 Disclosure:The Internal Revenue Code imposes substantial “accuracy-related” penalties on taxpayers for positions taken on a tax return that result in a substantial understatement of liability for tax. Taxpayers may avoid such penalties by adequately disclosing positions that are not based on “substantial authority” in accordance with the methods described under Treasury Regulations section 1.6662-4(f).
ABOUT THE AUTHOR: By: Christina M. Heischmidt, Attorney at DunlapWeaver PLLC
Christina is an attorney at DunlapWeaver PLLC practicing in Virginia and the District of Columbia. Her areas of practice focuses primarily on civil litigation in the areas of commercial, business and bankruptcy law. She also specializes in comprehensive estate planning and corporate transactional law. She was named to Virginia Business’s 2012 Legal Elite in Taxes/Estates/Trusts/Elder Law. Christina is active in numerous organizations including the Fairfax Bar Association’s Young Lawyers Section and the Trusts and Estates Section, the Northern Virginia Bankruptcy Bar Association, McLean Estate Planning Council, and a local women’s golf/networking group.
Copyright DunlapWeaver, PLLC
More information about DunlapWeaver, PLLC
View all articles published by DunlapWeaver, PLLC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
