In the midnight hour, Congress negotiated a deal to avoid the so-called fiscal cliff. Part of this deal included the American Taxpayer Relief Act, which President Barack Obama signed into law in early 2013. The Act provides clarity and certainty regarding federal estate taxes and gift taxes, after more than a decade of ever-changing estate planning currents.
Federal estate and gift taxes in flux for years
The Act made permanent many existing federal laws on estate and gift taxes, which is a relief to families, tax planners and estate planning lawyers who have dealt with frequently changing and significantly different laws over recent years.
In 2009, any estate or gift amount greater than $3.5 million was taxed at a rate of 45 percent upon the death of the individual or the giving of the gift. This law was set to expire in 2010, and most everyone expected Congress to act in time to set new or confirm existing estate and gift tax amounts. However, no law was enacted. For the first time since 1916, according to the New York Times, there was no federal estate tax, and no federal tax was imposed on the estate of anyone who died in 2010. There was also no federal gift tax imposed on gifts of any size.
For 2011, many people thought Congress would allow the federal estate and gift tax laws to revert to old levels, imposing estate taxes on any estate worth more than $1 million, at a rate of 55 percent. With the lower threshold for taxation and a higher tax rate, this would have had a very large impact. But, changing course again, new laws were enacted that imposed a federal estate tax on any estate larger than $5 million at a top rate of 35 percent.
The American Taxpayer Relief Act
The American Taxpayer Relief Act sets the exemption amount, or taxable threshold, for estates at $5 million, indexed for inflation. Any estate larger than $5 million will be taxed at a maximum rate of 40 percent. In addition, the amount of lifetime gifts that may be made without incurring federal gift tax is $1 million, with a tax rate of 55 percent for gifts totaling over $1 million.
Further, in addition to this tax-free $1 million lifetime gift amount, an individual may make gifts of up to $14,000 a year in 2013 to as many recipients as he or she likes without incurring gift taxes at all. These annual gifts do not count toward the lifetime $1 million amount.
Get legal help
If you have questions about how the American Taxpayer Relief Act affects you, or if your existing estate plans may need to be updated in light of these laws, contact a knowledgeable estate planning attorney. A lawyer can help you understand the impact of these laws and create an estate plan that expresses your wishes.