The American Tax Relief Act of 2012 (HR 8, the Act )

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1 NATIONAL CAPITAL GIFT PLANNING COUNCIL The Fiscal Cliff, Taxes and Planned Giving: Where Are We Now? Robert E. Madden Susan Leahy BLANK ROME LLP JANUARY 9, 2013 The American Tax Relief Act of 2012 (HR 8, the Act ) 1

2 Income Tax Reinstates 39.6% Rate Applies to: Taxpayers with taxable income over $400,000 Single filers $450,000 Married, filing jointly Estates and non-grantor trusts with taxable income over $11,650 Annual inflation adjustments after 2013 Taxable income = adjusted gross income ( AGI ) personal exemptions and itemized deductions, both of which are subject to limitations Capital Gains and Dividends Rates Taxpayers at 39.6% income tax rate: Increase from 15% to 20% 3.8% additional tax on net investment income (23.8% in aggregate for high-income individuals) above the following thresholds: $200,000 Single filers $250,000 Married, filing jointly Taxpayers below 25% income tax rate: 0% 2

3 Payroll Tax Increases Expiration of 2% holiday on Social Security tax everyone now pays 6.4% Additional Medicare tax of 0.9% above the following thresholds: $200,000 Single filers $250,000 Married, filing jointly Personal Exemption Phaseout The total amount of personal exemptions that a taxpayer can claim is reduced by 2% for each $2,500 (or portion thereof) of AGI that exceeds the following Threshold Amounts (subject to inflation after 2013): $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married filing separately. 3

4 Pease Limitation Reduces total amount of taxpayer s itemized deductions. Limitation is the lesser of: 3% x excess of AGI over Threshold Amount 80% of the taxpayer s otherwise allowable itemized deductions, e.g., charitable contributions, mortgage interest, state and local taxes. Example of Pease Limitation Donor s AGI = $1,000,000, which is $750, over the $250, threshold. Itemized deductions = $150,000. His itemized deductions are reduced by $22,500, which is the lesser of: 3% of $750,000 (amount over AGI threshold) = $22,500 80% of $150,000 (total itemized deductions) = $120,000 4

5 AMT Patch Alternative minimum tax: original purpose was to ensure high h net worth individuals id paid a minimum amount of federal income tax. The Act increases AMT exemption amounts to: $50,600 for unmarried taxpayers $78,750 for joint filers $39,375 for married filing separately Estate, Gift & GST Tax Rates Maximum marginal estate and gift tax rates, as well as flat generational-skipping transfer tax rate, increased from 35% to 40%. In states that impose a separate state estate tax, the effective estate tax rate could reach 50%, so we may see more lifetime gift planning. 5

6 Estate, Gift & GST Exemption Unified estate, gift and GST lifetime exemption amount at $5 million, adjusted for inflation. For 2013, approximately $5,250,000. Gift tax annual exclusion amount increased by $1,000 to $14,000 per donor/per donee, beginning i in 2013 Other Estate, Gift & GST Issues Portability allows any unused estate and gift tax exemption of a decedent to be transferred to his or her surviving spouse to be used during the survivor s lifetime, or at the survivor s death. State death taxes continue to be deductible for Federal estate tax purposes. Deemed allocation provisions of the GST tax, and relief from late GST allocations, both scheduled to expire, are extended. 6

7 Estate Planning Techniques Widely expected to be limited, restricted or prohibited, continue to be viable vehicles: Grantor trusts Grantor retained annuity trusts Sales to defective trusts Charitable lead annuity trusts Spousal limited access trusts Qualified personal residence trusts IRA Distributions to Charities The Act extends to December 31, 2013, tax- free IRS distributions to charities. Individuals over 70 ½ may transfer up to $100,000 per year directly from IRA to a public charity without including the amount in gross income. Distributions ib ti in January 2013 may be treated as being made in December 2012 distributions can be transferred in cash to a charity before Feb. 1 7

8 S Corporations Charitable Contribution of Property An S corporation generally does not pay tax so the S corporation s shareholders take the charitable contribution deduction resulting from an S corporation s charitable contribution of property. Through the end of 2013, the shareholder s basis decrease equals the shareholders pro rata share of the adjusted basis of the contributed property. 8