Fiscal cliff avoided — what it means for you

by Saul Ewing Arnstein & Lehr LLP


While most of us were celebrating the new year, members of the U.S. House and Senate were trying to prevent a fall over the dreaded "fiscal cliff," the combination of automatic tax increases and automatic reductions in federal spending. Late on January 1, they finally achieved their goal, and here is a brief summary of what they did.

Income Tax:

  1. The income tax rate reductions that were passed temporarily over the years have now been made permanent, except that joint filers with taxable income over $450,000 (and single individuals with taxable income over $400,000) will now have a maximum tax rate of 39.6%. These higher income brackets will be adjusted annually for inflation in the same manner as the lower income brackets.
  2. The maximum tax rate on long term capital gains and qualified dividends has now been fixed at 20% for those joint filers earning over $450,000 (and single individuals earning over $400,000), and 15% or less for those earning below that level. These rates do not include the additional Medicare tax of 3.8% on investment income under the health care reform law, which will apply to higher income filers ($250,000 joint, $200,000 individual) beginning in 2013.
  3. The temporary "fix" to the alternative minimum tax ("AMT"), which had to be reenacted every year, has now been made permanent in the form of an annual inflation adjustment, relieving Congress from the necessity of adjusting the AMT exemption amount for inflation every year.
  4. The law does not extend the 2 percentage point cut in Social Security payroll taxes that has been in effect for the last two years.
  5. For joint filers earning over $300,000 (and single individuals earning over $250,000), there will be a partial phase out of deductions for itemized deductions and personal exemptions. These provisions were previously in the law, went away and now they are back.
  6. The charitable IRA contribution provision, permitting those over 70½ to make a direct contribution of IRA assets to charity, has been resurrected for 2012 and 2013, but not made permanent. There are some special rules for 2012. First, distributions in January 2013 directly from an IRA to a charity can be treated as being made in 2012. Second, if an IRA distribution was received in December 2012, a gift to charity by the IRA recipient in January 2013 can be treated as though the gift were made in 2012.
  7. The rules on converting balances in 401(k) retirement plans into Roth 401(k) accounts have been relaxed, permitting conversion at any time.

Estate and Gift Tax:

  1. The exemption from federal estate tax has now been permanently fixed at $5,120,000, to be indexed for inflation.
  2. The gift tax exemption has also been permanently set at $5,120,000, indexed for inflation, allowing people to make substantial gifts to family members and others during life.
  3. The rate for estate and gift taxes has risen from 35% to 40%.
  4. Portability of the estate tax exemption has been made permanent. This means that if one spouse does not use the entire exemption at the first death, the surviving spouse can use it. This is a valuable simplification of the planning process, but with somewhat complicated rules.

Now What?

These changes in the law create many planning opportunities:

  • The gift tax exemption permits substantial transfers of assets during life, including business interests, sheltering the amount transferred and the future growth from estate taxation. The higher gift tax exemption also allows for more flexible asset protection planning.
  • For spouses, portability provides the opportunity to avoid creating a trust when the first spouse dies. There are tradeoffs to this approach, however, and it is important to understand these tradeoffs before relying on it.
  • The new law preserves the ability to make transfers of closely held assets, such as business interests, using discounted values. The use of discounts will continue to be under attack, perhaps in future legislation, but for now it's a very useful planning technique.
  • There were no restrictions imposed by the new law in grantor retained annuity trusts (GRATs), which allows the planning flexibility of setting up GRATs for as little as two years.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Saul Ewing Arnstein & Lehr LLP | Attorney Advertising

Written by:

Saul Ewing Arnstein & Lehr LLP

Saul Ewing Arnstein & Lehr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.