Pending Changes in Federal Taxes
Absent further action by Congress before the end of the year, we can expect to see many changes to our federal tax system in 2013, due to the pending "sunset" of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. The following chart illustrates the basic federal income tax changes at hand for married taxpayers filing jointly.
In addition to the increased tax rate for taxpayers other than those with low incomes, the maximum rate on capital gains and qualified dividends will also see a significant increase, from 15% to 20% capital gains and 39.6% qualified dividends, respectively. Moreover, high earners will see the return of the personal exemption phase-out and itemized deduction limitation.
With regard to federal transfer tax, gift and estate, all taxpayers currently enjoy a $5.12 million exclusion amount that can be applied to federal estate tax, federal gift tax, or any combination thereof. In 2013, the exclusion amount will drop to $1 million, and the top transfer tax rate will increase from 35% to 55%. Further, portability - the ability for surviving spouses to use the unused exclusion amount of a pre-deceased spouse - will be repealed entirely.
While there is some likelihood that Congress will act to extend or modify our current tax regime before year's end, the uncertainty surrounding current legislation requires estate and tax planners to anticipate a return to the pre-Bush tax rate levels. Taxpayers should also be prepared for the possible changes as we approach the new year.
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