Are You Prepared for the 2013 Tax Law Changes?
There are certain charitable and estate planning opportunities that will expire on December 31, and a slew of new tax laws that will impact you on January 1. Here's a summary of just a few things that could affect you:
Taxes Will Increase. The capital gains tax rate will increase from 15% to 20%, qualified dividends will be taxed at ordinary income rates, and marginal income tax rates will increase virtually across the board (with a top rate of 39.6%). The payroll tax break will expire, and the Medicare tax will increase for high income earners. There will also be a surcharge on investment income for certain high-earning taxpayers and several other additional taxes will come into play as the Affordable Care Act is fully implemented. Now is the time to see your tax advisor about steps you can take to help lower your income tax bill for 2012 and 2013.
Note that charitable contributions to William & Mary are still fully deductible in 2012, so you know what to expect for contributions made this year. However, if your marginal rate increases in 2013, those charitable contributions could be more valuable to you after January 1, provided a new tax law doesn't cap those deductions. While in the past it may have seemed highly unlikely that the income tax charitable deduction could come under fire, several of the plans floated by both political parties include provisions which would cap or even eliminate the charitable deduction for 2013 and going forward. If you are considering whether to make a larger contribution in 2012 or 2013, we strongly encourage you to seek out your professional advisors for guidance.
AMT Will Continue to Affect Middle Class. The Alternative Minimum Tax "patch" that had indexed the AMT for inflation expired on December 31, 2011, which means that the AMT is hitting middle class taxpayers this year. If Congress doesn't retroactively patch the AMT for 2012 and prospectively for 2013, many millions of unsuspecting taxpayers will be affected. If you are subject to the AMT in 2012 or 2013, you may not be able to enjoy the full benefit of your usual itemized deductions, including your charitable deductions.
Gift, Estate and Generation-Skipping Transfer Taxes Will Increase. The gift and estate tax exemptions will drop from $5.12 million to $1 million on January 1. The generation skipping transfer tax exemption (the additive tax assessed on gifts or bequests to a person two or more generations younger than you) will drop from $5.12 million to about $1.4 million. The top rate for all three taxes will increase from 35% to 55%. If your net assets are such that you would be subject to these taxes, and you have not yet done so, it is important that you see your tax advisor prior to year-end to see if you can take advantage of these expiring provisions.
The good news is that you will continue to receive unlimited estate and gift tax deductions for gifts or bequests to your spouse and qualified charities like William & Mary. In addition, your $13,000 annual gift tax exclusion for transfers in 2012 to any number of individuals will increase to $14,000 in 2013.
We will be happy to talk with you confidentially about your philanthropic plans for William & Mary, including naming us as a beneficiary of your estate plan. And we will keep a close watch on tax law developments as December 31 draws closer. Please contact us with questions.