United States: Tax And Estate Planning Effects Of The American Taxpayer Relief Act Of 2012

Keywords: tax and estate planning, American Taxpayer Relief Act 2012, federal income, estate tax, gift tax

The American Taxpayer Relief Act of 2012 (the Act) became effective on January 2, 2013. The Act contains a number of notable changes to the federal estate, gift, generation-skipping transfer (GST) and income tax laws, which are summarized in this Legal Update.

Estate, Gift and GST Tax Changes

Rates and Exemption Amount. Prior to the enactment of the Act, the estate, gift and GST tax rates were scheduled to increase from 35 percent to 55 percent in 2013. At the same time, the estate and gift tax exemption was scheduled to decrease from $5.12 million to $1 million and the GST tax exemption was scheduled to decrease from $5.12 million to approximately $1.39 million. However, the Act prevented these changes by providing new rates and exemption amounts for the estate, gift and GST taxes.

The Act purports to permanently unify the estate and gift taxes, meaning that the same rate and exemption amount will apply to the estate tax and the gift tax. The Act increases the estate and gift tax rate from 35 percent to 40 percent and sets the GST tax rate at a flat 40 percent. In addition, the Act makes permanent the $5 million estate, gift and GST tax exemption that has been in effect since 2011. This amount is adjusted for inflation after 2011, resulting in $5.25 million estate, gift and GST tax exemptions for 2013.

Portability. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 included a provision that allowed a surviving spouse to use a deceased spouse's unused estate tax exemption, referred to as "portability." The Act makes permanent this portability provision, which otherwise would have expired on December 31, 2012. Thus, a married couple has a combined federal estate and gift tax exemption of $10.5 million in 2013.

However, there is currently no portability at the state estate tax level. Accordingly, estate plans should be carefully structured so as to take advantage of federal estate and gift tax portability to the maximum extent possible, while minimizing state estate tax liability. In addition, the GST tax exemption is still not portable, so careful planning is necessary for taxpayers who wish to minimize future estate taxes by setting up GST or "dynasty" trusts for their descendants.

Annual Gift Tax Exclusion. As in prior years, the annual gift tax exclusion continues to be indexed for inflation. The annual gift tax exclusion amount increased from $13,000 per gift recipient for 2012 to $14,000 per gift recipient for 2013.

Income Tax Changes

Rates for Individuals. The Act makes permanent the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent marginal income tax rates for: ï," Married taxpayers filing jointly with taxable income of $450,000 or less.

  • Heads of household with taxable income of $425,000 or less.
  • Unmarried taxpayers with taxable income of $400,000 or less.
  • Married taxpayers filing separately with taxable income of $225,000 or less.

In addition, the Act creates a new top tax bracket with a marginal tax rate of 39.6 percent, which applies to taxpayers whose taxable income is higher than those listed above.

Rates for Trusts and Estates. The Act makes permanent the 15 percent, 25 percent, 28 percent and 33 percent marginal income tax rates for trusts and estates, while adding a new top 39.6 percent tax bracket, which applies after the first $11,950 of income. Income earned by "grantor trusts" will continue to be taxed to the grantor at the grantor's individual income tax rate.

Capital Gains and Dividends. For most taxpayers, the tax rate for capital gains and dividends remains 15 percent. However, the Act raises the top tax rate for capital gains and dividends to 20 percent for those taxpayers in the new 39.6 percent tax bracket. It should be noted that the Affordable Care Act (also known as "Obama Care") imposes an additional 3.8 percent tax on investment income, which effectively increases the capital gains and dividends rates from 15 percent and 20 percent to 18.8 percent and 23.8 percent, respectively.

S corporation shareholders should give careful consideration to whether this additional tax will apply to investment income received from the S corporation. Specifically, the 3.8 percent tax will apply to pass-through income earned by S corporation shareholders who do not actively participate in the business. On the other hand, pass-through income earned by S corporation shareholders who do actively participate in the business will not be subject to the additional tax imposed by the Affordable Care Act.

Alternative Minimum Tax. Following years of temporary patches, the Act permanently fixes the Alternative Minimum Tax by increasing the 2012 exemption amount and indexing the exemption amount for inflation in 2013 and beyond.

Reinstatement of Limit on Itemized

Deductions. The Act reinstates the "Pease" limitation on itemized deductions. The Pease limitation, which has not been in effect since 2010, applies when a taxpayer's adjusted gross income exceeds the following specified amounts, which are indexed for inflation:

  • $300,000 for married taxpayers filing jointly.
  • $275,000 for heads of household.
  • $250,000 for unmarried taxpayers.
  • $150,000 for married taxpayers filing separately.

The Pease limitation reduces a taxpayer's itemized deductions by the lesser of 3 percent of the amount by which the taxpayer's AGI exceeds the specified amount or 80 percent of the amount of itemized deductions the taxpayer would otherwise be allowed to take.

Reinstatement of Personal Exemption

Phase-out. The Act also reinstates the personal exemption phase-out (the PEP), which reduces the amount of personal exemptions allowable for certain higher income taxpayers. The PEP applies to taxpayers whose AGI exceeds certain threshold amounts. The threshold amounts at which the PEP will apply are the same as those amounts listed above for the Pease limitation. Under the PEP, a taxpayer's allowable personal exemptions are reduced by 2 percent for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the threshold amount.

Charitable Gifts From Retirement Plans

The Act reinstates a tax provision allowing taxpayers over age 70 1/2 to make up to $100,000 per year of tax-free charitable distributions from an IRA. Although this provision expired at the end of 2011, the Act provides that transfers from an IRA to charity made in January 2013 will be treated as having been made in 2012. Any transfers to charity made after February 1, 2013 will be treated as having been made in 2013. This provision has not been made permanent and is set to expire at the end of 2013. In addition, the Act provides taxpayers with a limited opportunity to take advantage retroactively of the IRA charitable rollover in 2012. Specifically, a taxpayer who received a distribution from his or her IRA between December 1, 2012, and December 31, 2012, may make a direct qualifying gift of a portion of that distribution to a qualifying charity until January 31, 2013. Subject to certain technical requirements, the charitable gift made by the taxpayer will be treated as if it had been made directly from the IRA to the charity.

Previously published on January 18, 2013

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.