By Randy Neumann
Forewarned is forearmed. Here is some information, explanations and, hopefully, a few good ideas that you can use regarding tax law changes. Let’s begin at the end – estate law changes for 2012. For those who remember, Congress made a circus of the estate tax in 2010 when the sunset provision of the law really “sunseted” for many months allowing some “lucky” people to die without paying an estate tax. Among those lucky folks (or should I say, their families) was George Steinbrenner (I loved the way my buddy Bill Gallo cartooned him with a World War I German helmet in the New York News). His family saved in the neighborhood of $500 million in estate taxes according to the AP.
Well, Congress finally got its act together and by year-end passed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJCA or “TRA 2010” for short), which created the estate tax law that is good till the end of this year. The estate tax, gift tax and generation-skipping transfer tax exemptions have been indexed for inflation for the 2012 tax year such that each will be increased from $5 million to $5.12 million beginning Jan. 1, 2012.
However, more important is the “portability” of the federal estate tax exemption for married couples. Prior to 2009, married couples had to set up a testamentary trust, which required a complex will, to maximize the exemption.
A simple will leaves everything to the survivor and makes the government happy. If John and Mary have a $10 million estate and John dies with a simple will, the government gets $5 million (or more) at Mary’s death. This is because John “wasted” his marital deduction.
A better plan uses a complex will that sets up a trust at John’s death into which he can transfer his $5 million exemption, usually for the benefit of his spouse until she dies. Since this money was not directly given to his spouse, it is not in her estate at her death and she still has a $5 million exemption of her own.
TRA 2010 eliminates the need for AB Trust planning or ABC Trust planning for federal estate taxes. It allows married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse’s estate tax exemption. This will effectively allow married couples to pass $10 million to their heirs free from federal estate taxes with absolutely no planning at all.
However, please note that the surviving spouse must file IRS Form 706, United States Estate (and Generation- Skipping Transfer) Tax Return, in order to take advantage of the deceased spouse’s unused estate tax exemption. Aside from this, as it now stands, portability is only available for deaths that occur during the 2011 and 2012 tax years. In addition, without AB Trust planning or ABC Trust planning, state estate taxes may be due in states that collect them.
So, be sure to consult with a qualified estate planning attorney because of these recent changes.
Moving on to qualified retirement plans; there are some small changes to plan contributions. 401(k), 403(b) and 457 plan annual contribution limits rise slightly to $17,000, and you can contribute an additional $5,500 to these accounts if you are 50 or older this year. IRA contribution levels are unchanged from 2011: The ceiling is $5,000, $6,000 if you will be 50 or older in 2012.
As you strive to contribute as much as you comfortably can to these accounts this year, you will probably notice some changes with the retirement plan at your workplace. In 2012, retirement plan sponsors (i.e., employers) will have to note all of the fees and expenses linked to a 401(k), (403(b), etc. You may notice some differences in the disclosures on your statements and you will probably notice more information coming your way regarding fees. There is also a push in Washington, D.C. to have financial companies provide lifetime income illustrations on retirement plan account statements, and projections of your expected monthly benefit at retirement age.
Looking at income taxes, higher earners are set to face greater income tax burdens in 2013, so 2012 may be the last year to take advantage of certain options. For example, the top tax bracket in 2013 is slated to be at 39.6 percent instead of the current 35 percent. This year, capital gains and dividends will be taxed at 15 percent or less for everyone, 0 percent for those in the 10 percent and 15 percent tax brackets. In 2013, the qualified capital gains tax rate is scheduled to rise to 20 percent and qualified dividends will be taxed as ordinary income. Therefore, taking more income in 2012 could be a good idea.
However, all of this may change based on the election in November, so stay tuned!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. This should not be considered tax advice for any individual. Neither Randy Neumann nor LPL Financial offers tax advice or services. Please consult your tax advisor regarding your specific situation.