President Obama signed the American Taxpayer Relief Act, effective Jan. 2, 2013.

This Act extended and made “permanent” the $5,000,000.00[1] Federal Exclusion amount [also referred to as the death tax exemption] that was previously set to reduce to $1,000,000.00 on January 1, 2013. The tax rate was also set at 40%, which is an increase from last year’s rate of 35% but lower than the 55% rate scheduled to become effective on January 1, 2013. The Federal Gift tax exemption was increased from $13,000.00 per year per donee to $14,000.00, and married couples can continue to “split” their gift by making annual gifts of $28,000.00 per donee. The Gift and Estate tax remain unified, which means individuals can use the $5,000,000.001 exclusion amount to make lifetime gifts up to that amount without any federal gift taxes. The Act also made permanent the “portability” of the federal exclusion between spouses. This means any of the federal exclusion not used by a pre-deceased spouse can be added to the exclusion amount for the surviving spouse; however, to preserve “portability,” Form 706 must be timely filed by the Personal Representative of the pre-deceased spouse.

The Tennessee death tax exemption increased to $1,250,000.00 on January 1, 2013 and will increase to $3,000,000.00 on January 1, 2014, then increases to $5,000,000.00 in 2015 before being phased out entirely on January 1, 2016. Given the differences between the exemption amounts set by Federal and State laws, all Tennessee residents with estates valued in excess of $1,250,000.00 should consult their estate planning attorney to review and discuss the impact of the recent federal legislation on their existing estate plan and estate planning documents.

Some of the “less than favorable” changes in existing Tax Laws contained in the American Taxpayer Relief Act include an increase in the Income Tax Rate on individuals earning more than $400,000.00 and married couples earning more than $450,000.00 from 35% to 39.6%; Capital Gains tax rate increased from 15% to 20%[2]; and a “Surtax on investment income” of 3.8% was created. The 3.8% Surtax on investment income applies to amounts in excess of $200,000.00 for single taxpayers and $250,000.00 for married taxpayers, and applies to non-grantor trusts with undistributed net investment income in excess of $12,000.00. All wage earners and self-employed earners are now subject to increased FICA payroll taxes, which were increased from 4.2% to 6.2%, resulting in significantly less take home pay for the majority of Americans. If you have any questions regarding any of these changes in tax laws, please call or email Sharon Potter or Kevin Dean.

[1] The $5,000,000.00 exclusion is indexed for inflation, so for 2013 the exclusion is actually $5,250,000.00.

[2] For individuals earning more than $400,000.00 and married couples earning more than $450,000.00.