Fiscal Cliff Averted (at least for now)

It appears that Congress has reached an agreement on the tax-side, but not the spending side, of the Fiscal Cliff situation.  Although the legislation has not been signed by the President yet, he has indicated that he will sign it.  In the agreement, Congress postponed their decision on automatic spending cuts for a short time.  Therefore, another Fiscal Cliff, albeit smaller, is on the horizon.

For our clients, the tax implications of the agreement are mostly good news.  Long-term capital gain and dividend rates will remain at 15% except for those earning more than $400-$450,000 (depending on marital status).  This is great news for anyone holding stocks, bonds or rental properties as the tax rate on the gain when you sell those investments will remain at 15%, assuming you have held them for at least a year before sale.

Perhaps the most important outcome from this agreement is its effect on estate and gift taxes.  In 2012, a person could pass up to $5.12 million by gift or inheritance, tax-free.  Any amounts over that exemption were taxed at 35%.  Absent an agreement from Congress, the exemption was set to fall to only $1 million with a 55% tax rate.  In this agreement, Congress has decided to set the exemption for both the estate tax and gift tax at $5 million with a 40% tax rate.  Additionally, this unused portion of the exemption is portable between spouses, which means the exemption is essentially doubled for a married couple to $10 million.  Best of all, the legislation makes all of the estate and gift tax laws permanent, so there is finally a little bit of certainty in this area.  The vast majority of Americans will no longer need to worry about the “death tax.”

A full summary of the provisions of the legislation, called the American Taxpayer Relief Act of 2012, is available here.

If you would like to discuss how these new laws affect you and your family, call us.  We can review your current plan or create a new plan that takes full advantage of all probate avoidance and tax minimization strategies available.