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Give unto Caesar - part II
October 8, 2012
by Brian Wolf

This week’s column is a continuation of last week’s column. To read any past column, just click on the media box on the website, www.wolftax.com.

Medicare tax increase

Currently, the FICA tax for Medicare is 1.45 percent for both employer and employee. Note that unlike the portion going for Social Security, the Medicare tax is not capped at $110,000.

Beginning Jan. 1, 2013, the employee’s portion of the tax will increase by .9 percent, to 2.35 percent for high-income taxpayers. For those who are married filing jointly, high income means having taxable income in excess of $250,000 per year. Once the high income threshold is met, the earned income to which the tax is applied is not capped. For someone earning $500,000 per year, and who has substantial other taxable income, this could mean an increase of $4,500 per year in FICA taxes.

Estate and gift taxes

The Economic Growth Tax Relief Reconciliation Act of 2001 (EGTRRA) phased out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010. The gift tax rate was lowered to 35 percent and had an exemption of $1 million in 2010. However, EGTRRA had a sunset provision, and in 2011, the estate and generation-skipping transfer tax was to come back into effect with a $1 million exemption. The gift, estate, and generation-skipping transfer tax rate was scheduled to be 55 percent in 2011.

Dec. 17 2010, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Act). With this law, Congress has once again rewritten the gift, estate, and generation-skipping transfer tax rules, but only through Dec. 31 2012.

The estate tax was retroactively reinstated effective Jan. 1, 2010, with an exclusion amount of $5 million and a maximum tax rate of 35 percent.

The generation-skipping transfer tax was not reinstated for 2010; therefore any generation skipping transfers completed between Jan. 1, 2010 and Dec. 31, 2010 were not subject to generation-skipping transfer tax (although gift taxes would apply at the rate of 35 percent to the extent the transfer exceeded $1 million). In 2011, the generation-skipping transfer tax returned, with an exclusion of $5 million and a top tax bracket of 35 percent.

In 2011, the gift and estate tax were reunified; that is, the exclusion amount and tax brackets for gift, estate, and generation skipping transfer tax were both the same; $5 million exclusion and maximum tax bracket of 35 percent.

The 2010 act introduced a new wrinkle – portability of unused exemption for a surviving spouse. Under the old law, for both spouses to get the benefit of the lifetime exemption, it was often necessary to use estate planning devices such as a bypass trust. The 2010 law allowed the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without use of a device such as a bypass trust. Congress hoped this would simplify estate planning.

In 2012, the estate tax exemption is 5.12 million (increased from the 2011 exemption of $5 million due to a cost-of-living adjustment), with a tip tax rate of 35 percent. Portability of the estate tax exemption will continue for 2012.

In 2013, the estate tax is scheduled to revert to an exemption of $1 million with a top marginal rate of 55 percent (with an additional surtax of 5 percent for taxable estates between $10 million and approximately $17 million), and portability will expire.

For 2012, the gift tax exemption and tip rate are unified with the estate tax. Accordingly, the exemption is $5.12 million and the top rate is 35 percent. The gift tax annual exclusion remains at $13,000. For 2013, the gift tax, like the estate tax, is scheduled to revert to an exemption of $1 million and a top rate of 55 percent (and a similar 5 percent surtax on certain gifts).

For 2012, the GST exemption is the same as the estate exemption, which is $5.12 million. The GST tax rate, which is the maximum estate tax rate, is 35 percent. For 2013, the GST exemption is schedule to revert to approximately $1.39 million, adjusted for inflation, with a rate of 55 percent. Check out the table for the significant gift and estate tax numbers for 2012 compared with 2013 and beyond.

What will the future hold?

Will congress at some point make the changes in the 2010 Act permanent? Your guess is as good as mine. The one thing I do know is that whether it’s ancient Rome or modern America; someone will always be after your money!

2012 2013 and beyond
Top Estate Tax Rate 35% 55%
Estate Tax Exemption $5,120,000 $1,000,000
Portability of estate tax Exemption Yes No
Top Gift Tax Rate 35% 55%
Gift Tax Exemption $5,120,000 $1,000,000
Gift Tax Annual Exclusion $13,000 $13,000 +inflation adjustment
Generation-Skipping Transfer Tax Rate 35% 55%
Generation-Skipping Transfer Tax Exemption $5,120,000 $1.4 million (approx.)


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