Here’s to 2014!

Last night, we watched as the ball dropped in Times Square to kick off yet another New Year. To quote from the Great Gatsby: “So we beat on, boats against the current, borne back ceaselessly into the past.”

One year ago, we were teetering on the brink of the “fiscal cliff,” before Congress finally voted to come to a partial compromise. On New Year’s Day 2013, Congress passed the “American Taxpayer Relief Act.” My how time flies!

So, we have just completed the first year of estate tax “certainty” in a long time.

From an estate tax perspective, ATRA made permanent all of the provisions of TRA 2010, except the rate. Now we have an exclusion of $5 million, adjusted for inflation. In 2014, it is $5,340,000. The tax rate is capped at 40%, as in 2013.

“Portability” is a permanent feature of ATRA and continues in 2014. ATRA did not address several items which the Administration has on its wish list. (For example, the Administration has wanted to limit GRATs by imposing a minimum term and has wanted to have GST exemption expire after 70 years.) Those items were not enacted in 2013 and are still on the Administration’s wish list.

We saw the gift tax present interest annual exclusion rise to $14,000 in 2013. It remains at that level in 2014.

On the income tax side, the tax rates on income below $400,000 (for single filers, $450,000 for married filing jointly) were made permanent at their then-current level. The tax rate for income above that level rose from 35% to 39.6%, the rate pre-2001. Further, qualified dividend and capital gain income tax rates went up from 15% to 20% for that same group. The rates which were in effect for 2013 remain in effect in 2014 for all groups.

The Affordable Care Act’s 3.8% tax on Net Investment Income kicked in for 2013. Thus, for taxpayers above the threshold income level, such income was taxed at an additional 3.8%. That is especially important for trusts and estates, which reach that threshold at only $11,950 in 2013 and $12,150 in 2014. (Unmarried individual taxpayers reach it at $200,000 and married filing joint taxpayers reach it at $250,000.) Thus, it will be important to consider making distributions in the first 65 days of 2014 and treat those distributions as having been made by the trust in 2013. These distributions would carry out income to the beneficiaries. While some beneficiaries might be subject to the 3.8% surtax, often many beneficiaries are not.

At this point, 2014 looks like it will be relatively quiet and stable regarding taxation. But, who knows what changes Congress may have in store for us. 2014 is an election year, so, while anything is possible, substantial change is unlikely prior to the Congressional elections in November.

I wish you all a happy, healthy, and prosperous New Year!

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com