The 2012 Tax Act: What you and your clients need to know

By Ron Roth

M&M Life Brokerage


Well, they finally got their act together in Washington and avoided the fiscal cliff. Many clients are asking how the tax law changes will affect themselves, their businesses and their estates. The following is a brief recap of how we understand the new law to read.

A recap of the 2012 Act
  • Estate and and gift tax exemptions have been unified. That amount is $5,000,000 per individual and $10,000,000 per couple. Without the 2012 Act, the estate and gift amounts would have reverted to $1 million and a 55 percent tax rate.

  • It is indexed for inflation, so the actual exemption is approximately $5.25 million.

  • The federal estate tax rate has been raised to 40 percent from 35 percent.

  • The annual exclusion has increased to $14,000 from $13,000.

  • The exemptions are portable by the surviving spouse.

  • Income tax rates on incomes over $400,000 ($450,000 joint) have been increased to 39.6 percent from 35 percent.

  • There are also changes limiting itemized deductions for individuals earning more than $250,000 ($300,000 joint).

  • Capital tax rates have been increased from 15 percent to between 20 percent and 23.9 percent, based on income

  • Financial instruments that may garner more attention again, would be split dollar plans, deferred compensation 162 bonus plans, as C Corps come back into favor.

  • To this end, clients should be investigating the use of captives, where appropriate.

  • Life insurance as an asset class remains a very interesting strategy. Clients are looking for stability and guarantees for a portion of their investment portfolio. Life insurance death benefits provide these qualities and more. We have been talking about this strategy for years and in the new tax environment, it only gets better.

  • IRA charitable “rollover” is permitted again for individuals over 70.5 up to $100,000, going directly from IRA custody to the charity. There is a window open until January 31st for 2012 contributions.

  • For wealthier clients, there is still a substantial tax advantage of gifting while alive, as opposed to waiting to pay estate taxes. That advantage is approximately $250,000 per $1,000,000 of assets. Also, appreciation of gifted assets occurs outside of the estate.