As most people are aware, President Obama recently signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Relief Act”), extending, for two years, the so-called Bush Tax Cuts.
Individual Tax Rates
The 2010 Tax Relief Act extends all individual rates at 10, 15, 25, 28, 33 and 35 percent for two years, through December 31, 2012. In addition, the income tax rate schedule used by estates and certain trusts (15, 25, 28, 33 and 35 percent) has been extended for two years. Further, qualified capital gains and dividends are taxed at a maximum rate of 15 percent (zero percent for taxpayers in the 10 and 15 percent income tax brackets) through December 31, 2012.
Estate and Gift Tax Changes
As you may recall, the federal estate tax is not applicable for anyone dying in 2010, but was set to be re-established on January 1, 2011. The 2010 Tax Relief Act revives the estate tax for decedents dying after December 31, 2009, but with a significantly higher exemption and lower tax rate. For individuals dying in 2011 or 2012, the estate tax exemption is now $5 million and the tax rate, for estates in excess of the $5 million exemption, is 35%. For individuals dying in 2010, the executor of the estate may elect to apply the new estate tax exemption rules.
In addition, the gift tax exemption, or the amount that may be gifted during your lifetime, tax free, which had been $1 million, was increased to $5 million to match the estate tax exemption. Also, the generation skipping tax, or the tax that applies to gifts that skip a generation (e.g. grandparent to grandchild), will have a temporary $5 million exemption.
Finally, with respect to changes to the federal estate tax laws, the 2010 Tax Relief Act introduced “portability” to the estate tax. Generally, portability would allow a surviving spouse to elect to take advantage of the unused portion of the estate tax exemption of his or her predeceased spouse. In order to take advantage of the portable estate tax exemption, an election must be made on the first deceased spouse’s estate tax return.
The two most critical issues to note with respect to the 2010 Tax Relief Act, with respect to estate taxes, is that Massachusetts does not follow the changes and the changes to the federal estate tax laws are set to expire, or sunset, at the end of 2012.
Massachusetts generally applies an estate tax for estates in excess of $1 million. It continues to be important to properly plan your estate so that, in most cases, if a Massachusetts tax is due, the tax is deferred until the death of the surviving spouse.
Given the complexities of the new tax laws, we recommend that you contact us to discuss how the new rules may affect your own estate plan. Furthermore, Substantial gifts should not be made until the effects of the same are thoroughly analyzed under the new laws.