Compromise Reached, But How Does It Effect Tax Planning For 2013?
In December, 2012, we addressed the looming “fiscal cliff” tax ramifications and potential last-minute tax planning. With legislation finally passed in late December, in order to prevent widespread tax increases and steep spending cuts, it is a good time to look at the highlights of the legislation and how it affects taxpayers.
- Income tax rates. A compromise was reached on income tax rates. Although neither side attained its goals, tax cuts were extended on incomes up to $400,000 for individuals and $450,000 for couples. Earnings above that are taxed at 39.6%, up from 35%. Many liberals and conservatives were unhappy with this compromise that extends the tax cuts for most taxpayers. Unless new legislation is passed, this extension is permanent.
- Estate taxes. The federal estate tax exemption remains at $5 million (adjusted for inflation) and up to $10 million for family estates. Without legislation, the exemption was set to return to $1 million for 2013. The top estate tax rate is set at 40%, up from 35%. This change is permanent.
- Capital gains and dividends. Capital gains tax rates were returned to those during the Clinton administration. Capital gains and dividend income will be taxed at 20%, an increase from 15%, for individuals with income at greater than $400,000 and families with income at greater than $450,000. This change is permanent.
- Other tax credits. Expansion of the child tax credit, the earned income credit and $2,500 college tuition tax credit were approved for a five (5) year duration.
- Other tax implications. Although most taxpayers will not see an increase in their income tax rates, most will be affected in their pocketbooks due to the lapse in the 2 percentage point cut in the payroll tax, returning the tax to 6.2 percent from 4.2 percent. Most employees have already noticed this in their paychecks, which is likely smaller than it was prior to January 1st due to this increase in payroll tax.
Looking Down The Fiscal Road For Future Tax Planning
Although it took far too long to reach an agreement, it seems that a compromise was reached that at least most taxpayers will find acceptable. Although wealthy taxpayers will see a significant tax increase, the alternative of no agreement would have greatly hurt everyone. Now, the next step is to address the issue of spending cuts and the ever increasing tax deficit.
© 2013, Ohio Family Law Blog. All rights reserved.
Joseph Balmer manages the Probate, Trust and Estate Administration department at Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has been certified by the Ohio State Bar Association as a specialist in Estate Planning, Trust and Probate Law since 2006.
