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TRUSTS & ESTATES: Washington Legislative Climate for Charitable and Estate Planning

How can you advise clients when the Washington legislative tax climate is foggy? And sometimes the fog lifts retroactively.

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — there are things we do not know we don’t know.”

Former United States Secretary of Defense
Donald Rumsfeld — press briefing 2/12/02

How can you advise clients when the Washington legislative tax climate is foggy? And sometimes the fog lifts retroactively.

With Mr. Rumsfeld’s words ringing in my ears, I’ll tell you:

  • What is now known about the income, capital gains, gift and estate tax rules for 2012.
  • What is now known about the income, capital gains, gift and estate tax rules for 2013, if Congress takes no action this year. (Remember David Brinkley’s admonition: “If you turn on your TV and see nothing is happening, do not call a serviceman. You have tuned in the U.S. Senate.”) Be mindful, Congress can, by midnight Dec. 31, 2013, enact laws that would be retroactively effective as of Jan. 1, 2013.
  • About the tax revision proposals for 2013 by the President and the still-standing major candidates for the Republican presidential nomination. Plus, the much-heralded Buffett Rule.
  • The known unknowns: who will be the next president and the party that will control the House and the Senate.

The unknown unknowns: Oh, if I only knew!

KNOWN KNOWNS FOR 2012

Ordinary income tax rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

Capital gains and dividend rates. For taxpayers in the 25 percent bracket and above, the capital gains and qualified dividend rate is 15 percent. For taxpayers below the 25 percent bracket, the rate is zero.

Exceptions. Gains on sales of artworks (and so-called collectibles) held long term (more than one year) are taxable at 28 percent. Unrecaptured gain on a sale of real property is subject to a 25 percent rate. The gain on sales of capital assets held short term (one year or less) is taxed in the regular income tax brackets — up to 35 percent.

Charitable gifts. No tax incentives for Charitable IRAs, and no enhanced tax incentives for gifts of stock by S Corporations, food inventory gifts, book inventory gifts, corporate gifts of qualified research and computer technology and conservation gifts.

No itemized deduction limitation. Since 1991, the amount of certain itemized deductions (including the charitable deduction) that a taxpayer may claim had been reduced, to the extent the taxpayer’s AGI was above a specified — adjusted for inflation — amount. This limitation is often called the “Pease limitation,” or the “3 percent haircut.” That limitation on itemized deductions is inapplicable in 2012.

No personal exemption phase-out. Personal exemptions allow a certain amount per person to be exempt from tax. Under a personal exemption phase-out (PEP), exemptions are phased out for taxpayers with AGIs above a certain level. The PEP is inapplicable in 2012...

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(Read more from our sister publication, Trusts & Estates.)

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