Nuts and Bolts of the New Tax Law
The new tax law affects just about everyone. It covers income tax rates, deductions, exemptions, credits, gift/estate taxes, and much more. In general, we can say that:
- A lot stays the same for most taxpayers.
- Some provisions that once were temporary are now permanent—which is actually a good thing.
- Higher-income taxpayers will be paying more income tax in 2013.
Reviewing everything at once could be daunting. Therefore, it’s helpful to break the new law down into pieces to see how each part fits into your personal planning.
For Most People, Not Much Has Changed
Many rules in effect for the past decade have been made permanent by the new tax law. The really important rules are the ones about taxing income.
The income tax rates lowered last decade remain in place.
Ordinary income can be taxed at 10%, 15%, 25%, 28%, 33%, or 35%. Those rates are the same as they were last year (except there is a new top rate of 39.6% for joint filers for joint filers with AGI above $450,000 and single filers with AGI above $400,000).
The tax rates on long-term capital gains and qualified dividends depends on the top income tax rate you pay:
- 0% for those with a top income tax rate of either 10% or 15%
- 15% for those with a top income tax rate of 25%, 28%, 33% or 35%
- 20% for those with a top income tax rate of 39.6%
The value of a deduction depends on the top income tax rate the donor pays. If a donor takes itemized deductions and pays income tax at 25%, a gift of $1,000 is worth $250 in tax savings. If someone pays income tax at 35%, that gift is worth $350 in tax savings.
Certain itemized deductions are renewed for 2012 and 2013. The main one is the option to deduct state or local sales tax instead of state or local income tax. This is useful in states that do not impose income tax, or for people who paid more in sales tax on expensive items in a particular year than they owe in income tax.
There is also the chance to deduct tuition expenses and student loan interest.
Look on the Bright Side
There are many positives to the new estate and gift tax rules:
- The new rules mean that 99.8% of estates will potentially owe no tax in 2013, according to a recent report by the Tax Policy Center.
- Fewer people will need to worry about the ravaging effects of the estate tax.
- People can plan with more confidence when providing for loved ones and charities.
- A charitable bequest will provide an example for family and friends.
If you have included IU in your estate plans or would like to explore a potential gift, contact us.
The New (Old) Rules for Estate and Gift Taxes
The news on estate and gift taxes is mostly good, because the rates and amounts are now permanent. For the past decade or so, the tax rate and the exemption amount changed from year to year. And in 2010, there was no estate tax at all! The trend was toward less estate and gift taxes, but the uncertainty along the way was unnerving.
Here are the main points to remember about the federal estate and gift tax law going forward:
- New top tax rate of 40% is permanent.
- Unified applicable exclusion amount of $5 million will increase from year to year according to inflation. (Right now, it is $5.25 million.)
- Portability remains in place, allowing a surviving spouse to get the benefit of any applicable exclusion amount not used by the deceased spouse’s estate.
IRA Charitable Rollover
The big news for charitable giving in the new tax law is the renewal of the IRA charitable rollover. If you already know about this way of giving, you understand how well it accomplishes both financial and philanthropic goals. This provision allows donors age 70½ or over to direct a distribution from their IRA directly to a charity. A donor can direct up to $100,000 per year to charity in this manner.
There are three reasons why the IRA charitable rollover is a great way to contribute to IU through the IU Foundation.
- The money you direct to a charity counts toward your required minimum distribution (RMD), which must be taken each year by IRA owners age 70½ and over. This is an important detail in retirement planning.
- The amount you direct to charity is excluded from your federal income. This can be crucial since a variety of taxes are triggered by higher income. Keeping your income down can avoid taxes in more ways than one.
- The donation that the IU Foundation receives from your IRA can go to work at once to help Indiana University. You may support the IU campus, program, or department of your choice.
Plan to act now. Remember that the IRA charitable rollover is only in place until December 31, 2013. And be aware that while completing the gift is relatively simple, it takes some time. Contact us for more information about the IRA Charitable Rollover.
Smart Tax Planning Can Include Charitable Giving
Just as there are options when selecting ways to meet financial and tax planning goals, there are options for meeting philanthropic goals. Charitable giving can be an important component in your overall financial strategy, and we are happy to help you identify options that work for you. Please get in touch, and be sure to request our complimentary brochure, The American Taxpayer Relief Act of 2012—How It Affects Your Planning. You can reach us by phone or email. Thank you for considering our mission as you plan in 2013.