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American Taxpayer Relief Act of 2012

By:  Jennifer Jordan McCall, Ellen Harrison, Elizabeth Fry, Kim Schoknecht, Hiram Powers-Heaven

On New Year’s Day 2013, to avoid the so-called “fiscal cliff,” Congress passed the American Taxpayer Relief Act of 2012 (“2012 Act”). The 2012 Act raises taxes on some taxpayers while retaining most of the provisions enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA,” generally referred to as the “Bush tax cuts”) and the two-year extension of EGTRRA enacted at the end of 2010. Most of the changes introduced by the 2012 Act relate to income tax; however, there are important changes to the gift, estate, and generation-skipping transfer tax provisions as well.

Under the 2012 Act, the gift, estate, and generation-skipping transfer tax provisions of Internal Revenue Code are now “permanent,” meaning that the sunset provisions of EGTRRA have been repealed. The current law has no expiration date. The $5 million exemptions for the gift tax, estate tax and the generation-skipping transfer tax (collectively, the “transfer taxes”) are still provided and are to be indexed for inflation. The exemptions are indexed to $5.25 million this year, so that taxpayers who gave away the full $5.12M in 2012 can still give an additional $130,000 this year sheltered by the gift tax and/or generation-skipping transfer tax exemptions. To the extent that gift tax or estate tax is incurred under the 2012 Act, the top marginal rate was increased from 35% to 40%. In addition, “portability,” which permits a surviving spouse to use any unused estate tax exemption of the deceased spouse, has been made permanent.