Congress finally came to an agreement to avoid the “fiscal cliff,” and the agreement includes some changes to federal estate taxes and Individual Retirement Accounts (IRAs). The American Taxpayer Relief Act sets a permanent estate tax rate and provides a tax break for cash donated to charities from an IRA.
The new law makes only minor changes to the federal estate tax. The amount that you can transfer tax-free either during life or at death will remain the same as it has the past two years. The law permanently sets the estate tax exemption at $5 million for an individual (now $5.12 million due to inflation) and $10 million for a couple (now $10.24 million). (With new inflation adjustments, the exemptions are estimated to rise to about $5.2 million and $10.4 million.) The lifetime gift tax exclusion – the amount you can give away without incurring a tax – also remains the same at $5.12 million. But you can still give any number of other people $14,000 each per year without the gifts counting against the lifetime limit.
Under the new law, the gift and estate tax rate will increase from 35 percent to 40 percent. This means that if you transfer more than $5.12 million either during your life or upon your death, your estate will be taxed at 40 percent. The new law also makes permanent the “portability” provision currently in place. This allows a surviving spouse to add the unused portion of a deceased spouse’s exclusion to his or her own. Note that portability is not automatic — the estate must file an estate tax form when the first spouse dies even if no tax is owed.
The new estate tax rates and rules are “permanent,” but only until Congress decides to revisit them and the President agrees to the changes. But keep in mind that the new law does not address state estate taxes, which many states have.
The fiscal cliff deal also brings back a tax provision called the IRA charitable rollover that had expired in 2011. The law extends the provision through 2013. This allows investors aged 70 ½ or older to transfer as much as $100,000 a year from an IRA directly to a charity without counting it as taxable income. Non-Roth IRA owners are required to take yearly minimum distributions from their IRAs starting at age 70 1/2, and the charitable donation can count toward the taxpayer’s minimum required distribution for the year.
For more details on how the new laws affect your personal situation, contact your tax advisor or your estate planning attorney.