Permanent Estate Gift and Generation Skipping Transfer Tax: The estate tax was one debate that was divided down party lines, and had several possible outcomes. The 2012 Act provides much more of a compromise than expected. The maximum federal estate tax rate was set at 40 percent, with an annually inflation-adjusted exclusion of $5 million for those dying after Dec. 31, 2012. This amount, adjusted for inflation, results in a $5.25 million estate, gift and generation skipping transfer tax exemption for 2013. The portability feature that was introduced in 2010 was also made permanent. A married couple should be able to transfer $10,500,000, based on 2013 amounts, during their lives or at death, and can even make such gifts to grandchildren or more remote descendants, without incurring a generation skipping transfer tax.
Mortgage Debt Relief: Generally, if you owe a debt to someone and they cancel or forgive that debt, the canceled amount may be taxable. The Mortgage Debt Relief Act of 2007 created a provision that excludes from income up to $2 million of forgiven debt on a principal residence. This provision has been extended through 2013. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision is designed to help homeowners avoid further financial difficulties by avoiding tax on “shadow income.”
Deduction for State and Local General Sales Tax: Taxpayers can elect to take an itemized deduction for state and local general sales tax in lieu of the deduction permitted for state and local income taxes. This option mainly benefits taxpayers in states with no state income tax; however, it can benefit taxpayers who make big-ticket purchases. A sales tax deduction may exceed your state income tax deduction when you itemize your deductions. If you are considering a big-ticket purchase this year, discuss the purchase with your tax adviser, as you could benefit from a potentially increased tax deduction.
Energy Tax Credit: While many energy credits have expired since the heyday of tax credits on alternative fuel vehicles, the 2012 Act extends the tax credits for certain energy-efficient improvements to existing homes. Basically, if you haven’t taken a tax credit for energy-efficient fans, windows, skylights, qualified natural gas, propane, or oil furnace or hot water boiler, you may want to consult with your tax adviser. The Act also extends through 2013 tax credits for cellulosic biofuel production, incentives for biodiesel and renewable diesel producers, and credits for facilities that produce energy from wind facilities.
Overall, the American Taxpayer Relief Act of 2012 extended a considerable number of tax breaks, despite the initial shock of the increased taxes on the wealthy.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The MDJ will periodically publish columns from KSU business faculty.