The New Year brings with it changes to tax rates that are indexed for inflation or otherwise set to adjust each year. Many estate planning clients will want to consider adjusting their plans based on the shifts in the tax rates. And all of them will appreciate knowing what changes the IRS has in store for them.
For 2015, the watchword is “minimal;” with inflation remaining at historically low rates, many of the tax rates are little changed for the New Year. In fact, the new tax rates look so much like the old tax rates that some people may not notice they’ve changed. Some of the new rates to consider:
The $5.43 million federal estate tax exemption is up from $5.34 million in 2014. Those may look like the same two figures, but note that the 3 and 4 have been reversed. The 40 percent top federal estate tax rate remains the same.
The increases for the lifetime gift tax exemption and the generation-skipping trust tax exemption are the same: up to $5.43 million from $5.34 million in 2014, and a 40 percent top federal tax rate.
The annual gift tax exclusion remains at $14,000, with no increase from 2014.
Income tax rates are unchanged. Individual ordinary income tax rates will remain the same in 2015, with a maximum rate of 39.6 percent.
Taxpayers whose ordinary income is taxed at that 39.6 percent level will pay long-term capital gains of 20 percent.
Taxpayers in lower tax brackets will continue to see their long-term capital gains taxed at no more than 15 percent.
There is one minor change to the Medicare surtax rates: The threshold for the 3.8 percent Medicare surtax on investment income and the 0.9 percent Medicare surtax on earned income will remain at $200,000 for single filers, $250,000 for married filing jointly, but for trusts and estates, the threshold rises to $12,300.
So there’s not much going on here, which isn’t necessarily a good thing. In times when the exemptions are increasing significantly, clients have the opportunity to make larger lifetime gifts, or to make use of tactics such as grantor trusts.
Or they can transfer assets to their children or grandchildren who may be in lower income tax brackets or in states with no income tax. When the rates and exemptions aren’t moving very much, that limits what an estate planner can do for his or her clients.
President Obama’s budget contains several proposals that could impact estate planning and tax issues in 2015. The most important to estate planners is a call for exclusion amounts to roll back to their 2009 levels, which would mean GST applicable exclusion amounts of $3.5 million and a gift tax applicable exclusion amount of only $1 million. Obama also called for no inflation indexing to any of the exclusion amounts. But with a Republican-controlled House and Senate in place for the remainder of the president’s term, it’s safe to assume these proposals are dead in the water.
The reason none of these tax rates and exemptions are changing very much is because inflation has remained so low. Inflation has been running at about 1.4 percent lately, significantly below the Federal Reserve’s target inflation rate of 2.0 percent.
In fact, inflation has been at historic lows lately. The 1.5 percent inflation rate recorded for 2013 was the nation’s lowest since 1964, with the sole exception of the recession-fueled 2009. If the rate for 2014 comes in below 2.0 percent, which looks highly likely, it would mark the first time we have had back-to-back years of inflation below 2.0 percent since 1964-65.
And economists think that is likely to persist. According to a survey of professional forecasters conducted by the Philadelphia Fed, the one-year predicted increase in the consumer price index is just 1.9 percent. Over the longer term, the forecasters predict inflation to run at just 2.2 percent over the next ten years. That’s the lowest figure in the history of the survey, dating back to 1991.
So there aren’t likely to be many significant changes to the inflation-adjusted exemptions in the coming years. Estate planners would do well to keep an eye on Congress instead for opportunities to take advantages of changes in the tax code.