AMERICAN TAXPAYER RELIEF ACT OF
In the last
few months, you’ve probably heard the term “fiscal cliff” with such irritating frequency that it ranks right
up there with such tiring expressions as “kinda”, “like” (as in, like, an extraneous, like, word that
adds no meaning, like, to what you are saying) and “it is what it is”. At the last moment in 2012, Congress finally
took the plunge and put us out of the fiscal cliff misery. Kinda. So what can you expect from the American Taxpayer Relief
Act of 2012 (“ATRA”)? The short answer is a more complicated tax code.
Estate, Gift, and Generation Skipping Taxes
estate and gift tax is a unified tax, which means you get a certain amount of tax exemption (“unified credit”)
that you can use on lifetime taxable gifts and transfers at death. Prior
to January 1, 2013, you were entitled to make annual gifts of up to $13,000 per person (“annual exclusion gift”)
without affecting your unified credit. The annual exclusion gift amount increased January 1, 2013, to
$14,000. This means you can give up to $14,000 per person per year to as many people as you are inclined to gift. A gift of
up to $14,000 per year to any one person does not decrease your unified credit. The unified credit in place for 2011 and 2012 was $5,000,000, with a cost-of-living adjustment
(“COLA”) each year (the unified credit in 2012 was $5,120,000 with the COLA adjustment).
Part of the fiscal cliff crisis was the sunset provisions relating to the unified credit: if Congress did nothing, the unified
credit would have reverted to $1,000,000 as of January 1, 2013. After much posturing,
Congress has retained the unified credit at $5,000,000 per person, with a built-in COLA. As a result of the COLA, the actual
unified credit available in 2013 is $5,250,000. Again, this amount applies to the combined total of your
lifetime taxable gifts (annual gifts in excess of $14,000 to any one individual) and to your taxable estate at death. Some of you made sizable taxable gifts in 2012 in order to take advantage of the $5,000,000
unified credit because it was scheduled to revert to $1,000,000 at the end of 2012. Because the COLA
sets the actual unified credit amount at $5,250,000, you now have an additional $250,000 available to make gifts if you so
choose. The tax rate after you exhaust your unified credit
is 40%. While this is an increase over the 35% rate that was in place in 2011-2012, let’s keep it in perspective: the
current 40% rate is otherwise still the lowest that the top estate tax rate has been since 1931. It is way lower than
the 77% rate that was in place between 1941-1976. To quote Shakespeare’s Friar Laurence, “There are thou happy.”
And, while we are counting our blessings, keep in mind that although 16 states and the District of Columbia
still impose separate inheritance or estate taxes (on top of the federal estate tax), Michigan does not. The generation-skipping transfer tax (“GSTT”) also has a $5,250,000 exemption
($5,000,000 with a COLA adjustment). The GSTT tax is not a unified tax with the estate and gift tax. In other words, GSTT
gifts you make have their own exemption – they do not reduce your estate and gift tax unified credit. Another benefit that was carried forward is the concept of “portability”. In simple
terms, portability means that if a spouse dies without using all of his or her unified credit, the surviving spouse is entitled
to the deceased spouse’s unused exemption (“DSUE”) in addition to his or her own unified credit. Keep in
mind the only way to preserve portability of the DSUE is to file a federal estate tax return for each spouse. And, portability
only applies to deaths occurring in 2011 or later. Note: portability does not apply to
For those of you who prepare your own income tax
returns, I offer another quote from Shakespeare: “If you have tears, prepare to shed them now”, because Congress
has created so many different tax thresholds that you may need an actuary to keep track of them. The highest tax bracket for taxpayers who have taxable income (excluding qualified dividends
and long-term gain) in excess of $400,000 (single filers) or $450,000 (married filing jointly) will increase to 39.6%. Additionally, for these taxpayers, a new 20% tax rate will apply to qualified dividend income and long-term capital
gains. Even if you don’t reach the $400,000/$450,000 threshold, you will
lose some of your personal exemptions and itemized deductions when your adjusted gross income exceeds $250,000 (single filers)
or $300,000 (married couples filing jointly). Additionally, your net investment income will be subject to a new
3.8% Medicare income tax if your adjusted gross estate exceeds $200,000 (single filers) or $250,000 (married couples filing
jointly). Trust and estates will also be subject
to the 3.8% Medicare income tax based on the lesser of the adjusted gross income or net investment income that exceeds $11,950.
Note: the 3.8% Medicare income tax does not apply to income that is distributed or distributable by the decedent’s
trust or will. There is a permanent patch for the alternative minimum tax with
exemptions of $50,600 for single filers and $78,500 for married couples filing jointly.
in mind that although none of the above changes have automatic sunset provisions, nothing should be
viewed as permanent. Our tax code has undergone regular changes over the years and the provisions of ARTA, like all tax acts
before it, will only remain in place until a new Congress decides to change them. So, like, ARTA is what it is - for now.
SPOUSE OF NURSING HOME RESIDENT RETAINS
THE RIGHT TO SHELTER ASSETS
Although significant changes have been made to tighten
eligibility for Medicaid benefits, a nursing home resident’s spouse can still shelter assets by creating and funding
a special trust for their benefit. The trust, as described in this article, can be created and funded in
the same month that Medicaid is applied for. In 1993, spouses of nursing home residents were granted special
protections under the federal Medicaid legislation allowing them to shelter assets during their lifetime. The
controlling public policy determined that spouses left at home should not be impoverished before the government was willing
to step in to help pay the way of their institutionalized spouse. Michigan’s Medicaid program eligibility
rules implement this public policy by classifying trusts established solely for the benefit of the community spouse as “non-countable”
These special trusts permit otherwise countable assets to be sheltered for the benefit of the at-home
spouse through a relatively easy and quick process. It works like this:
1. Spouse establishes a trust that meets the following requirements:In writing;Irrevocable;At-home spouse is sole beneficiary; andTrust assets are scheduled to be distributed back to the at-home
spouse on an actuarially sound basis.
2. Otherwise countable assets are transferred into the name of the trust.
spouse applies for Medicaid.
4. The trust assets are not countable for Medicaid eligibility purposes.
For example, Mary, age 70, has a published life expectancy of 15.72 years. She
and her husband, Art, own a home, a cottage worth $150,000 and have investments totaling $180,000. Under Michigan’s
Medicaid rules, their home is an exempt asset, however, the cottage and investments are countable ($330,000). If no trust
were established, the couple could keep $109,560 of their countable assets. They would have to spend down, convert or divest
the remaining $220,440 in countable assets before Art would be eligible for Medicaid assistance.
By creating a “Spousal
Trust” and transferring to the trust the cottage and $70,440 of investment dollars, Art can become immediately eligible
for Medicaid assistance. Art will still have a patient pay amount, based on his income, but there will
be no penalty for transferring these assets to the spouse’s trust before applying for Medicaid. [Note,
however, that if Mary subsequently requires nursing home care for herself, the assets remaining in the trust will be available
for payment of her care needs.]
The ability to qualify
the institutionalized spouse for Medicaid benefits while sheltering assets for the at-home spouse offers a valuable planning
technique for a couple faced with the costs of maintaining their home and other on-going expenses as well as the added (and
often, unexpected) high cost of nursing home care.
MILEAGE RATES FOR 2012
The IRS has set the following rates for mileage reimbursement
$ .55 per mile for business mileage
$ .23 per mile for medical or moving-related mileage
$ .14 per mile
for service to charitable organizations
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