New tax laws bring some stability, new questions to estate planning

By James O. Preston, senior director of development, University of Missouri Office of Gift Planning and Endowments

The passage of the American Taxpayer Relief Act of 2012 (ATRA) produced stability in one important area of the tax code: the estate tax. The now stable estate tax keeps the significant exemptions for estate and gift tax purposes at $5.25 million indexed for inflation. The rate is now 40 percent on any amount over the exemption in an estate.

The new law shifts the focus of planning from the estate tax to income taxes. For most people, this means paying special attention to the treatment of retirement accounts in their estate plans.

Non-Roth retirement accounts have been so popular they can be the largest single asset class in many estates. Designed to be spent when retirees have less taxable income, increasingly people are choosing to spend little or nothing from retirement accounts, hoping to save them for their children’s inheritance. But unlike appreciated stock, or real estate, these assets pass the tax burden along to heirs. Without careful planning, children may owe income tax to the government for a large percentage of the account. Since non-profit entities like the university and extension do not pay income tax, these assets make better estate gifts.

For some donors, making a gift now in the form of a charitable gift annuity will give them spendable income, a portion of which will be tax-free, and include an immediate income tax deduction.

Speaking of the charitable deduction, ATRA did not change the deduction in spite of some proposals that would have limited it for higher income donors. This issue may resurface in the next round of fiscal negotiations.

Here are a few other changes:

  • New tax rate at the top is now 39.6 percent for individuals with adjusted gross income (AGI) of $400,000, and $450,000 for couples filing jointly. These amounts will be adjusted for inflation in subsequent years.The new law reduces itemized deductions for higher income earners. Individuals with AGI of $250,000 and households with AGI of $300,000 have a phase-out of certain itemized deductions.
  • Capital gains and qualified dividends tax rates increase for high-income households going from 15 to 20 percent for taxpayers in the 39.6 percent tax bracket. These taxpayers will also pay surtax for Medicare on investment income.