Thanks to the last-minute deal to avoid the “fiscal cliff,” which was finalized on Jan. 1, Congress has permanently set federal estate and gift tax exemptions at $5 million (adjusted only to inflation), with the tax rate above that exemption set at 40 percent. 

The estate tax has fluctuated and attracted great attention for more than a decade. Since 2001, the exemption per person for the estate tax rose from $675,000, with a 55 percent tax for anything above that amount, to $3.5 million in 2009 with a 45 percent tax rate for estates larger than that. Estate plans were written (and subsequently re-written almost annually) to account for these increases in exemptions.

But in 2010, Congress and President Obama could not reach an agreement on the tax, and for the first time since 1916, Americans who died that year were not subject to a federal estate “death” tax.

At the end of 2010, the new exemption was set to $5 million, indexed to inflation, with a 35 percent tax rate on any amount over that. This exemption was set for two years only. That same year, taxes and exemptions for gifts made during someone’s lifetime also increased to the $5 million level, from $1 million with a 55 percent tax above that. Because of the looming Dec. 31, 2012, deadline, many took advantage of the new $5 million lifetime exemption and gave accordingly over the past two years, uncertain of what would occur come Jan. 1, 2013. 

With the fiscal cliff behind us, and the $5 million exemption a steadfast tax fixture, now is the perfect time to create or update your estate plan so you can make the most of your giving. Also, if you or someone you know rushed to give the maximum lifetime gift before the potential 2013 expiration date, you may want to consider consulting with a Certififed Financial Advisors to help you assess your portfolio to see where you may still be able to give now and in the future through your estate. 

FINANCIAL FACTS 

Health Care – U.S. states had until Dec. 14, 2012, to decide how they will set up health-insurance exchanges by 2014, i.e., a website where consumers would choose a health plan. Eighteen states elected to set up their own state-run exchange, seven states decided to partner with the federal government to create an exchange, and 25 states are going to let the Federal government run their exchange (source: Department of Health and Human Services, BTN Research).  

Muni Bonds – Congress is considering federal income taxation of municipal bond income. One idea is to limit the tax exemption on municipal bond interest income at a 28 percent rate. States and municipalities have protested that a federal tax on state and local bonds could lead to reduced services or higher taxes (source: BTN Research).  

New CPI - The proposed change in the way the Consumer Price Index (CPI) is calculated would not only lower future Social Security benefits but would also result in higher tax revenue, because the new CPI would result in smaller year-to-year changes for indexing tax brackets.  The changes are estimated to be worth $365 billion over 10 years (source: Congress, BTN Research).