As we approach the end of 2012, there is much uncertainty regarding tax legislation. Tax rates, exemptions, credits and deductions are likely to change for both businesses and individuals, but no one yet knows which of the predicted changes will really come to pass. How do you prepare for this uncertain future? Take advantage of the 2012 rates while you still can and plan for contingencies in 2013 and beyond.
2013 Tax Changes
For the remainder of 2012, we have some pretty favorable estate, gift and generation-skipping transfer (GST) tax provisions. The estate tax and GST tax exemption is currently $5.12 million and the lifetime gift tax exemption is also $5.12 million. The top estate, gift and GST tax rate is currently 35 percent. Unless Congress acts to extend the 2010 Tax Act provisions (the so called “Bush-era tax cuts”), they are set to expire December 31, 2012. What does that mean?
Without legislation, the estate, gift and GST tax laws will revert to their state prior to the 2010 Tax Act. On January 1, 2013 the exemption will drop to $1 million(indexed for inflation) for estate, gift and GST tax purposes. Also, the top tax rate will return to 55 percent. The combination of the increased rates and decreased exemptions means that Uncle Sam will get a significantly bigger piece of wealth transferred in 2013 than in 2012.
2012 Tax Planning Tips
Your challenge for the remainder of 2012 is to take advantage of planning opportunities that may have a limited lifespan. You should definitely review your current estate planning documents. The potential tax law changes for 2013 may change things and you’ll want to make sure your estate plan still meets your goals. You should also consider:
- Annual exclusion gifts. The benefits of making $13,000 annual exclusion gifts should not be underestimated.
- Tuition and medical expense payments. Tuition payments made directly to an educational organization are not treated as taxable gifts, and neither are payments made directly to a medical care provider for a person’s medical care.
- Lifetime gifts. With the $5.12 million gift exemption for 2012, individuals who have the resources to do so should consider giving away substantial amounts of property without incurring gift tax. There are planning techniques to get the biggest bang for the exemption. For example, valuation discounts and fractional interest discounts may allow you to remove more of the asset from your estate.
- Taxable gifts. For high net worth individuals, making large taxable gifts at a 35 percent tax rate versus a potential 55 percent tax rate may make sense.
- Charitable giving techniques. If you have charitable intentions, the low interest rate environment provides for favorable planned giving techniques such as Charitable Lead Trusts.
Currently, these tax breaks are a “use it or lose it” opportunity. Although the future is uncertain, they might not be there in 2013.
Ohio Estate Tax Planning
In some ways, the estate tax is a voluntary tax. Those who plan pay a minimum amount of estate, gift and GST tax. Those who fail to plan pay more. Want to limit your payment of these voluntary taxes? Contact Rea & Associates. Our Ohio tax planning professionals help families and business owners protect and preserve their wealth. Contact us today to put these limited time tax savings opportunities to work for you.