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New Year’s tax changes: what to expect

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With the New Year will come a new set of tax rates and tax codes for your clients to deal with. Many of these will affect not only their estate planning in the coming year, but quite possibly the last-minute moves they wish to make from now through the end of 2013.

Many of the changes are indexed to inflation, and with the consumer price index running at a tepid 1.0 percent, the increases have been modest. Still the numbers present a bit of a moving target and are worth keeping an eye on. Here’s a rundown of some of the changes that are already in the books for 2014:

Estate taxes

The estate tax exemption is going up but just marginally, to $5.34 million in 2014 from $5.25 million in 2013. The American Taxpayer Relief Act of 2012 set the estate exemption to remain static, although it’s indexed to inflation, which is why it increased by 1.7 percent for next year. The estate tax rate itself remains unchanged at 40 percent.

Gift taxes

The annual gift tax exemption amount remains static at $14,000 per recipient, although the lifetime exclusion rises to $5.34 million. One rather esoteric change: The annual gift exemption amount for noncitizen spouses increases to $145,000 in 2014 from $143,000 in 2013.

Alternative minimum tax

The AMT is always a potential problem for even middle-class people who itemize deductions. The exemption is projected to rise to $82,100 for married couples filing jointly and surviving spouses, $52,800 for unmarried single filers and heads of household and $41,050 for married couples filing separately in 2014.

Clients who fear being subject to the AMT this year but might miss it next year could try to defer some of their deductions into 2014, when they would actually be able to use them.

Income taxes

While individual income tax rates will remain the same in 2014, some of the threshold amounts at which taxpayers become affected by those rates are rising. The threshold amount for the maximum tax rate of 39.6 percent is rising to $457,600 for married couples filing jointly, $228,800 for married couples filing separately, $432,200 for heads of households, and $406,750 for single filers.

Capital gains taxes

The thresholds at which people will become subject to the different levels of capital gains taxes has been ratcheted up a notch. The top capital gains rate of 20 percent now applies to incomes of $457,600 for married couples, up from $450,000 last year.

For single filers, the threshold rises to $406,750 from $400,000. Remember, those figures are for taxable income, not just the amount of the capital gains themselves.

Standard Deductions and Exemptions The standard deduction increases to $12,400 for married couples filing jointly, up from $12,200 for 2013; and $6,200 for singles and married people filing separately, up from $6,100. The personal exemption amount jumps to $3,950 from $3,900 for 2013. But the amount begins to phase out between $305,500 and $427,550 for married couples, and between $254,200 and $376,700 for single filers. Medicare surtax

As part of the ObamaCare reform, many people are now paying a Medicare surtax: The income limits are not indexed to inflation, and remain the same for 2014 as they were for 2013: $200,000 for single filers, $250,000 for married filers filing jointly, $125,000 for married filers filing separately, and $11,950 for trusts and estates.

Also unchanged are the tax rates: a 3.8% Medicare surtax on investment income and 0.9% Medicare surtax on earned income.

Pease limitations

The minimum income threshold to claim itemized deductions in 2014 is $254,200 for single taxpayers ($305,050 for married couples filing jointly). This limit — known as the “Pease Limitation,” after the Ohio congressman who first introduced the idea back in 1990 — had been scaled back in previous years but returned with the American Taxpayer Relief Act of 2012.

If your income is higher than $305,050 for married couples ($254,200 for single filers) the amount of itemized deductions that you can claim is reduced by 3% of the amount by which your adjusted gross income exceeds those limits.

It’s not likely to be a huge adjustment for most taxpayers, but the bottom line is that your clients can’t just assume they will be able to fully itemize their deductions. In making year-end adjustments to their estate plan, that’s an important consideration to keep in mind.