TAX ALERT 2012
Federal Legislation Allowing Tax-Free IRA Rollover Gifts to Charity Expired in 2011, but Congress is Considering Extending It Into 2012.
This provision expired in 2011. Congress is considering extending it into 2012, but has not done so yet. We will post any updates if and when this occurs.
Normally, all IRA withdrawals are taxable to you (whether taken as a required minimum distribution from your IRA or from your other IRA funds). However, anyone age 70 1/2 and older can make tax-free IRA rollover gifts to Lyric Opera in 2011 of up to $100,000. These gifts can be in lieu of your IRA minimum required distributions in 2011, which you would roll over to charity rather than withdrawing. There is no tax imposed on these IRA rollover gifts to charity (and no charitable deduction or donor benefits allowed for these kinds of gifts).
The IRA rollover law is a unique opportunity, for those who do not itemize their deductions, to make a charitable gift tax-free. Since a charitable gift can only be taken as an itemized deduction from your income tax, those who do not itemize were never able to take advantage of the charitable deduction. But if you use your IRA to make a gift to Lyric, you will not have to pay any tax on your IRA withdrawal, even if you don’t itemize.
By using your IRA to make gifts now, you can prepay existing pledges you have with Lyric Opera, and avoid the IRA withdrawal tax. Or you can prepay gifts you may wish to make to Lyric in the future, and still procure the same tax-free benefits now.
This law was recently re-enacted by Congress. You can again directly roll over your IRA funds – tax free – as a gift to Lyric Opera any time prior to December 31, 2011. Simply contact your IRA fund administrator for the applicable rollover forms, or call Lyric’s planned giving office for details.
CHANGES TO FEDERAL AND ILLINOIS TAX LAWS
In December 2010, Congress enacted, and the President signed, a revision in the tax laws which will apply through 2012. The 2010 Tax Act created some stability to the unpredictability of federal income and estate taxes for at least the next two years, preserving or creating a number of tax cuts. In 2013, federal income and estate tax rates may revert to higher 2001 tax rates unless changed by Congress again.
A month later, in January 2011, the Illinois legislature passed, and the Governor signed, the Illinois 2011 Tax act which increased Illinois income and estate taxes. So the net effect of all this on Illinois taxpayers may be a “wash” (or worse) depending on your individual situation. Here are the details.
A. The Federal 2010 Tax Act
1. Income Tax
The federal 2010 Tax Act essentially preserved the Bush-era income tax cuts enacted in 2001. This applied to individual tax rates, qualified dividends, capital gains, and the marriage penalty relief. It also preserved a number of other beneficial tax credits including the child tax credit, earned income tax credit, adoption credit, dependent care credit, and educational assistance exclusion.
For 2011 and through February only, of 2012, the tax act also reduced the Social Security taxes paid by employees from 6.2% to 4.2%, for earnings up to $106,800. This was a one-year-only tax break. For 2011 and through February only, of 2012, the full 6.2% FICA taxes will again be imposed on employees unless changed by Congress. The President has proposed extending these reduced FICA tax rates though all of 2012, along with other tax law changes. However as of now, Congress has not acted on them. We will post any updates if and when they occurs.
2. Estate and Gift Tax
The tax act also established a federal estate tax exemption of $5 million and a maximum estate tax of 35% for those dying in 2010, 2011, and 2012. For those selling inherited property, any capital gains tax would be based on the more advantageous “stepped-up” basis (which sets the “basis” of the property as the value at death, rather than for what the decedent bought the property years before, usually at a much lower price).
For those dying in 2010 when there was no estate tax, the estate has the option of paying the above estate tax, or of not paying any estate tax but using a decedent’s “carry-over” basis when computing capital gains tax on the sale of inherited property. Often paying the estate tax will be much lower than using “carry-over” basis to pay the capital gains tax.
The lifetime gift tax exemption was “unified” with the estate tax in 2011 and 2012 at the same $5 million exemption and 35% gift tax rate. This is over and above the annual gift tax exclusion of $13,000, which each taxpayer can give to any number of persons desired.
Finally, the 2010 Tax Act provides for “portability” of the $5 million estate tax exemption between spouses. This means that if the first spouse to die does not use all of his or her $5 million exemption, the surviving spouse can use the balance, in addition to his or her own $5 million exemption. It is not lost as it was under prior law.
B. The Illinois 2011 Tax Act
What the Taxman Giveth, He Taketh Away!
3. State Income Tax
For Illinois taxpayers, the income tax was “temporarily” increased from 3% to 5% for the years 2011-2014. Then the tax will decrease to 3.75% for 2015-2024 and to 3.25% thereafter. So for 2011, the 2% increase in Illinois income tax will effectively offset the one-time 2% decrease in the federal Social Security tax discussed above.
4. State Estate Tax
Illinois also reinstated its estate tax to allow only a $2 million exemption (as compared with the federal $5 million estate tax exemption). As a result, in 2011 and 2012, a decedent can pass $5 million to descendants free of federal estate tax, but must pay Illinois estate tax on amounts over $2 million.
Keep your estate plan up to date
As a result of all the tax changes, above, it is important to consult with your attorney or financial advisor to make sure your estate plan is updated to conform with today’s tax laws. Since the federal tax changes are only through 2012, your estate plan must also be flexible enough to deal with any future tax changes which may occur.
We can help. Call us with any questions you may have.