Tax Planning Update

Ronald A. Fatoullah, Esq. and Stacey Meshnick, Esq
September 11, 2013 — 1,982 views  
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Dramatic changes have occurred in the past 12 years with regard to estate and income tax laws which make tax and estate planning an arduous process for many Americans.

This article aims to clarify the estate tax and income tax changes resulting from the Economic Growth and Tax Relief Reconciliation Act of 2001, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, and the Taxpayer Relief Act of 2012.

Long-term care insurance has become increasingly popular given the current cost of long term care. Fortunately, long-term care insurance premiums paid for tax-qualified policies are considered a medical expense for income tax purposes. Individual taxpayers can treat as a medical expense premiums paid for long-term care insurance policies for themselves, their spouses or any tax dependents (such as parents). The yearly maximum deductible amount for each individual contract depends on the insured's age at the close of the taxable year. The deductible maximums are indexed and increase each year for inflation.

The 2013 federal deduction limits for long term care insurance premiums are as follows:

More than 40 years old but not more than 50:  $680

More than 50 but not more than 60:  $1,360

More than 60 but not more than 70:   $3,640

More than 70:  $4,550

Prior to 2013, medical expenses were deductible from Adjusted Gross Income (AGI) to the extent that they exceeded 7.5% of AGI.  Starting in 2013, medical expenses are deductible only to the extent that they exceed 10% of the AGI.  However, until 2017, the increase does not apply to those who are 65 and over.  For married taxpayers filing a joint return, only one of them must be 65 by the end of 2012 for the deferral to apply

In addition to the federal deduction for premiums, New York State offers a tax credit of 20% of long term care insurance premiums paid. In other words, individuals get a dollar for dollar credit (not a deduction) against any income tax due.

A new top income tax rate of 39.6% applies to taxable income above $400,000 ($450,000 for married couples) adjusted for inflation after 2013.

The highest rate for long-term capital gains and qualified dividends is 20% for taxpayers with taxable income above $400,000 ($450,000 for married couples). The maximum rate of 20% is in addition to the 3.8% surtax on investment type income and capital gains for taxpayers with modified adjusted gross income above $125,000 ($250,000 for married couples).

Other than income tax, another area of concern for many individuals is the estate tax.  The maximum estate tax rate is now set at 40%.  The estate tax exemption is now permanently set at $5,000,000 with adjustment for inflation. For 2013 that amount is currently $5,250,000. Due to the federal gift tax and estate tax exemptions being “unified,” the current gift tax exemption is also $5,250,000.

New York State estate tax continues to be “decoupled” from federal tax, i.e. New York State tax is not unified with that tax. Currently the New York State estate tax exemption is $1,000,000. As before, New York State does not impose a gift tax.

Now permanent are the federal “portability” provisions that allow the estate of a decedent survived by a spouse to elect to use the decedent’s unused federal exclusion amount (e.g. $5,250,00) for the surviving spouse’s transfers during lifetime or death. Portability does not apply to New York State estate tax.

The generation skipping transfer tax (GST) exemption is the same as the federal estate tax exemption, currently $5,250,000. The GST tax rate is the maximum estate tax rate of 40% beginning January 1, 2013.

Given that there is no New York State gift tax, as long as assets at the time of death are no more than $100,000, New York State estate tax will be eliminated if assets are gifted out during one’s lifetime.

Ronald A. Fatoullah, Esq. and Stacey Meshnick, Esq

Ronald Fatoullah & Associates

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that exclusively concentrates in elder law, estate planning, Medicaid planning, probate, guardianships, trusts and wills. The firm has offices in Forest Hills, Great Neck, Manhattan, Brooklyn, and Cedarhurst, NY. This article was co-written by Stacey Meshnick, Esq., senior staff attorney at the firm who has chaired the firm’s Medicaid department for over 15 years. Ronald Fatoullah & Associates can be reached by calling (718) 261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.