When Congress passed and President Barack Obama signed into law the American Taxpayer Relief Act in the first week of January — averting the so-called fiscal cliff— it made permanent the previous two years’ exclusions on estate and gift taxes. And those exclusions have been adjusted for inflation.
As reported by Bloomberg, this means that taxpayers will be able to leave an extra $130,000 to their heirs free of estate taxes this year under cost-of-living adjustments announced by the Internal Revenue Service. The estate-tax exemption for 2013 will be $5.25 million for individuals, up from $5.12 million in 2012, the IRS said. For married couples, the combined threshold is $10.5 million. Passing the law also affected gift taxes, and it raised the top tax rate after the exclusions from 35 percent to 40 percent, according to Forbes.
Gift taxes, too
The gift tax exclusion under the new law keeps in place the $5 million amount (also adjusted to $5.25 million) allowed for each American, and it makes permanent the unification of gift tax and estate tax exclusion amounts. What unification means is this: Each person can make lifetime gifts of up to $5.25 million without triggering taxes. But, gifts that use a portion of the gift tax exclusion count against your estate tax exclusion available at death. For example, if you gave a gift of $1 million to your child, your estate tax exclusion at death drops to $4.25 million, Forbes says. The lifetime gift tax exclusion does not alter the annual tax-free gift exclusion, which is currently $14,000 per person or $28,000 for a married couple. The annual tax-free gift does not count against the lifetime exclusion unless the gift is for more than $14,000.
Marriage an asset
Under the new law, spouses continue to reap benefits when they inherit assets from each other. For estate and gift taxes, you get unlimited deductions that postpone the tax owed on those assets until the second spouse dies, with one very important exception: the marital deduction applies only if the spouse inheriting the assets is a U.S. citizen.
Spouses also retain the portability benefit. The surviving spouse is allowed to add any unused gift or estate tax exclusion of the spouse who died to their own. In practical terms, this means the surviving spouse could wind up with $10.5 million tax-free. This benefit is not automatic, however. The estate’s executor must transfer the unused exclusion to the survivor, who then must file an estate tax return within nine months, even if no taxes are owed. The surviving spouse then can make lifetime gifts or pass money and assets through his or her estate.
The fine print
Income taxes on the wealthiest Americans — now defined as those who make more than $400,000 individually or $450,000 as a family — have increased from 35 to 39.6 percent. You can use the annual exclusion, $14,000, to set up a Section 529 education savings plan for children or grandchildren, helping offset college costs. The best advice I can give you: Take advantage of the act’s provisions now. If anything is certain in Washington, “permanent” laws are anything but!