Nobody has a crystal ball. I’ve sat through presentation after presentation (and given a couple myself) on the state of the federal estate and gift tax for 2013 and beyond. There are all kinds of theories about what might happen. But the reality is, we know very little.
Quite frankly, much of it hinges on what happens in November. And no, I’m not talking about the presidential election. Realistically, although the President may claim to drive policy when it comes to the federal estate and gift tax, he doesn’t. Congress does.
So let’s talk about what will happen if nothing happens. I know that sounds weird… but what I mean is what is slated to happen unless Congress actually proposes – and passes – legislation that alters the schedule.
As it stands today, on January 1, 2013, the federal estate and gift tax law will revert to those which were in effect in 2001. That means that the federal estate tax exemption will only be $1 million (as opposed to the $5 million exemption currently in effect) and the rate for married couples will not be portable. The federal estate tax will top out at 55%. The gift tax exemptions and rates will follow suit.
Practically, that also means a return in state estate taxes. The “pick up tax” or “slack tax” – the amount that tended to be the difference between the federal estate tax state death tax credit and the actual state death tax payable – was phased out in 2005. Without a state death tax credit, the formula used by many states was meaningless, so there was no actual state estate tax payable. Since the state estate tax wasn’t actually repealed and is still on the books in most states, a reversion on the federal estate tax side to the 2001 rates also means a reversion for state estate tax purposes. Pretty crazy, right?
All of this could change tomorrow. Okay, not tomorrow. Congress isn’t in session until mid-November. Even then, you can expect a lot of gloating and not much action. But eventually, say, in December, they’ll do something. Until then, the 2013 rules are soooo 2001.
There is one change taking effect in January 2013 that’s new: the annual gift tax exclusion. The annual gift tax exclusion amount, which is adjusted annually, will be $14,000 for 2013, as announced by IRS last week (it won’t be in hard copy until it hits the Internal Revenue Bulletin 2012-45 on Nov. 5, 2012). That means that taxpayers can make gifts of up to $14,000 per person in 2013 without any federal gift tax consequences (and yes, the per person qualifier means that you can gift up to $14,000 each to one person or a million people without owing a penny in federal gift tax).
As to what else is to come? You tell me… Your guesses?
Security Tax Services LLC
North Sound South Sound
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