2013 INFLATION ADJUSTMENTS

The Internal Revenue Service has announced the annual inflation adjustments for many tax provisions for tax year 2013.

For example –

• The maximum elective deferral for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500.

• The catch-up contribution limit for employees aged 50 and over who participate in these types of plans remains unchanged at $5,500.

• The deduction for taxpayers making contributions to a traditional IRA is phased out for Singles and Head of Household filers who are active participants in an employer sponsored retirement plan with a Modified Adjusted Gross Income (MAGI) of between $59,000 and $69,000, up from $58,000 and $68,000 in 2012.

For Married Filing Jointly, where the spouse who makes the IRA contribution is an active participant, the phase-out range is $95,000 to $115,000, up from $92,000 to $112,000. 

For contributions to the IRA of a spouse who is not an active participant the deduction is phased out if the couple’s MAGI is between $178,000 and $188,000, up from $173,000 and $183,000.

• The ROTH IRA contribution phase-out range is $178,000 to $188,000 for Married Filing Joint, up from $173,000 to $183,000 in 2012.  For Single and Head of Household filers the phase-out range is $112,000 to $127,000, up from $110,000 to $125,000. 

 

• The upper AGI limit for the Retirement Savings Contribution Credit is $59,000 for Married Filing Joint, up from $57,500 in 2012, $44,250 for Heads of Household, up from $43,125, and $29,500 Single and Married Filing Separate, up from $28,750.

• The annual gift exclusion is increased to $14,000, up from $13,000 for 2012.

• The Foreign Earned Income Exclusion is $97,600, up from $95,100 in 2012.

I will bring you additional inflation adjustments for 2013 as they are released.

TTFN

THE TAX HIKE PREVENTION ACT OF 2010 - THE ESTATE AND GIFT TAXES

Like the “Bush” tax cuts, the federal Estate Tax has only been extended through December 31, 2012 by The Tax Hike Prevention Act of 2010. However the extension begins with decedents who go to their final audit after December 31, 2009 – thereby reinstating the Estate Tax for 2010.

The Estate Tax exemption is increased to $5 Million and the top rate is reduced to 35%.

The Act also provides for “portability” of the $5 Million exemption between spouses beginning in 2011. This means that a surviving spouse can elect (on a timely filed Estate Tax Return) to add the unused portion of the deceased spouse’s exemption to their $5 Million exemption – allowing married couples to take full advantage of $10 Million in exemptions.

In his post “Bush-Rate Extension Passes; What It Means” Joe Kristan quotes Estate planning attorney Wayne Reames on the impact of this “portability” –

“As we think about it, portability is going to create more work, not less. First, portability only applies if the first-to-die files an estate tax return. Thus, we’ll have to file returns for all these people with less than $5M.”

So if a surviving spouse wants to be able to take advantage of the unused exemption of a deceased spouse, a federal Estate Tax return will have to be filed for the first spouse to pass, regardless of whether or not one is required.

With the return of the federal Estate Tax also comes the return of unlimited “step-up” in basis for all inherited property. Thank the Lord!

The estates of decedents who passed in calendar year 2010 have a choice -

* The estate can elect not to be covered by the new Estate Tax rules (treated as if there was no Estate Tax), with stepped-up basis limited to $1.3 Million in assets. Or

* The estate can elect to be covered under the new Estate Tax regime, with a $5 Million exclusion, 35% top rate, and unlimited step-up in basis.

How and when the choice is made is to be determined by the Internal Revenue Service.

Thankfully, beginning with taxable gifts made after 2010, the federal Gift Tax is once again matched to the Estate Tax, with a “lifetime exclusion” of $5 Million, the same as the Estate Tax exemption, and a top rate of 35%. For gifts made in 2010 the top rate is 35%, but the lifetime exclusion is only $1 Million.

Unlike the Democrats (I do not consider myself either a Democrat or a Republican, as the elected officials of both parties, following the written scripts of their party, have proven to be, for the most part, idiots) I have no problem with this new Estate Tax. I have only one client couple who could actually have a taxable estate, although maybe not when the portability between spouses is considered. I am delighted that once again there is an unlimited step-up in basis for inherited property, and the Gift Tax lifetime exclusion matches the Estate Tax exemption.

TTFN

WHAT ABOUT THE GIFT TAX?

There has been lots of talk about the federal Estate Tax lately, what with its disappearance for 2010 and reappearance at pre-Bush levels in 2011. But what about its cousin – the federal Gift Tax?
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The Gift Tax is a “spin-off” of the Estate Tax. Its purpose is to make sure that individuals do not give away all of their assets before death to avoid paying Estate Tax.

First some background -

The Gift Tax is imposed on the “giver” (or “donor”) – the person making the gift – and not on the person receiving the gift (the “donee”).

A gift has no affect on federal or state income taxes. Over the years I have been asked many times something along the lines of, “I read somewhere that I can give my son a gift of $XX,000 each year. If I do this will it help reduce my income tax?”. The answer is always “no”. You cannot deduct a gift on your 1040, and the recipient of a gift does not have to report the gift as taxable income on his/her 1040.

For 2010 and 2011 there is an annual Gift Tax exclusion of $13,000 and a “lifetime exclusion” of $1 Million. These are two separate exclusions – one has nothing to do with the other.

You can give $13,000 to as many individuals you want – relatives, friends or even strangers – in 2010, and 2011, with no gift, or future estate, tax consequences. This $13,000 does not affect the $1 Million lifetime exclusion. A married couple can gift $26,000.

If you make gifts to one individual that total more than $13,000 in one year you still do not necessarily have to pay any current gift tax. You can apply the excess gift to your $1 Million lifetime gift tax exclusion amount. You can give up to a total of $1 Million in gifts that exceed the annual exclusion limit during your lifetime before you will owe any gift tax.

If you gave your son $15,000 in 2010 then $2,000 of this gift will reduce the $1 Million, so you have a remaining lifetime exclusion of $998,000.

The Gift Tax is reported on Form 709. If you do gift more than $13,000 to an individual during the year you should file a Form 709 to show the application of the excess toward your $1 Million lifetime exclusion.

The following items are not considered to be taxable gifts, and do not count toward the $13,000 per year annual exclusion or reduce the $1 Million lifetime exclusion amount –

* the support of a member of your household,

* gifts made to a spouse,

* college tuition paid directly to the educational institution for another person, and

* medical expenses paid directly to the provider (doctor, dentist, hospital, therapist, etc) on behalf of another person.

The Gift Tax also does not apply to gifts to political organizations or campaigns or to gifts to church and charity

The lifetime Gift Tax exclusion amount is supposed to be the same as the federal Estate Tax exemption, but under the “Economic Growth and Tax Relief Reconciliation Act of 2001” this amount was for some reason “frozen” at $1 Million. So, even though the federal Estate Tax exemption had grown to $3.5 Million for 2009, the lifetime exclusion for Gift Tax purposes remained only $1 Million. And even though the federal Estate Tax totally disappeared, for one year only, in 2010, the federal Gift Tax is still in place for 2010.

This makes absolutely no sense. The only reason for the existence of the Gift Tax is so individuals do not avoid the Estate Tax by giving away their assets prior to death. So the lifetime exclusion for the Gift Tax should always be exactly the same as the Estate Tax exemption. The Gift Tax amount should not have been frozen at $1 Million.

Without an Estate Tax there is no need for a Gift Tax. So why, if the Estate Tax is gone, is the gift tax still around for 2010? I expect that Congress knew that the Estate Tax would return in 2011 (it would not be permanently repealed by Congress in the interim) so it did not want taxpayers to escape future estate tax by giving away the store in 2010.

I would hope that when the federal Estate Tax is finally either repealed or reformed there is consistent treatment of the Gift Tax. If the Estate Tax is repealed there should be no Gift Tax. If the Estate Tax is reformed, the lifetime exclusion under the Gift Tax should be the same as the exemption under the Estate Tax.

TTFN