The budget deal also didn’t extend a two-percentage point cut in the payroll tax for workers of all income levels that expired Dec. 31. Also, it brings back limits on personal exemptions and itemized deductions for top earners that had been phased out and sets those thresholds at $250,000 for individuals and $300,000 for married couples.
“It’s a stealth tax,” said Jere Doyle, senior wealth strategist at Bank of New York Mellon Corp. “Where people will get hit is those who have substantial itemized deductions. They’re going to take a haircut once you go over a certain amount.”
That can bump a person’s marginal tax rate up by 1 percent to 2 percent, Doyle said.
Millionaires also saw relief with taxes paid on gifts and on estates at death compared with Obama’s past proposals. The law makes permanent a $5.12 million exemption, or $10.24 million for married couples, on lifetime gifts and estates. It also indexes those levels for inflation so they will increase over time.
$1 Million Threshold
The thresholds were set to drop to $1 million if Congress hadn’t acted, while the president wanted to set the estate tax exemption at $3.5 million.
“I’m thrilled about the fact that this act makes permanent all the provisions” related to estates and gifts, said Carol Harrington, an estate-planning attorney and head of the private client practice group at McDermott, Will & Emery. “I’m skipping around the office throwing confetti in the air over this issue.”
Still, the new law increases the top tax rates on estates or gifts in excess of the $5.12 million or $10.24 million exemption limits to 40 percent from 35 percent. Obama had proposed a 45 percent rate and it was set to rise to 55 percent if Congress hadn’t acted.
‘Significant’ Increase
“It’s a significant rate increase,” Harrington said. “Obviously 40 is a heck of a lot better than 55.”