Important Tax Provisions in the New Law

Because the new tax law only lasts two years, estate plans need to be designed to withstand further changes from Congress. Although most attorneys agree that it is unlikely that the $5 million estate tax exemption will be lowered, it would be imprudent to create a plan that didn’t consider that as a possibility. One way to do this is to utilize disclaimer trusts. These allow surviving spouses to decide how much to take from the marital assets and how much to disclaim.

Other key provisions in the new tax law that are important for high income taxpayers to be aware of are below:

• Personal Exemptions. The personal exemption phase-out is suspended through 2012, which saves heterosexual married couples with two children approximately $5,180 a year.
• Itemized Deductions. The rules that reduced itemized deductions will remain suspended through 2012, which is approximately a 1% cut in marginal tax rates.
• Capital Gains. The 15% tax on long-term capital gains is extended through 2012. In 2012, the rules expand to include dividend reinvestment plans and mutual funds, and in 2013 to include debt instruments.
• State and Local Taxes. Taxpayers who itemize can either deduct state income tax or sales taxes, but not both.
• Retroactive Estate Tax. Estates of those who died in 2010 may choose to either pay estate taxes or avoid them. Those who elect to avoid the estate tax only get $1.3 million step-up in basis for capital gains purposes.
• Energy Tax Credit. The 30% tax credit for energy-saving improvements to homes has been reduced to 10% with a $500 lifetime cap.

See David Cay Johnston, Certainty on Tax, but Just for Two Years, N.Y. Times, Feb. 9, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.