New Ways to Minimize Income Taxes for Estates, Trusts and Beneficiaries

Will Rogers has been quoted as saying, “The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” Earlier this year, Congress passed the American Taxpayer Relief Act of 2012, which may have prevented us from falling off the fiscal cliff, but further complicated the already complex world of income taxation of estates and trusts.
Whether you are a fiduciary or beneficiary of an estate or trust, or one of their advisors, you should take note of some of the more important changes under the new income tax laws, as well as strategies that can be employed to minimize the tax.For some of those strategies to be effective, action must be taken right away.

Fiduciaries, in particular, should be familiar with these strategies and deadlines. Beneficiaries will not be very happy if they or their trusts are forced to pay additional income taxes that could have been avoided with a little planning on the fiduciary’s part.

Increase in Ordinary Income and Capital Gains Tax Rates
The top tax rate on ordinary income has increased from 35 to 39.6 percent. For individuals, the top rate kicks in at taxable income of $400,000 (or $450,000 if married filing jointly); however, for estates and trusts in 2013, the top rate kicks in at taxable income of only $11,950.

The rate on long-term capital gains and qualified dividends has increased from 15 to 20 percent.

Medicare Surtax
There is also a new tax that applies beginning in 2013, the so-called Medicare surtax, which is a 3.8 percent tax on “net investment income.” Net investment income generally includes (a) interest, dividends, annuities, royalties and rents, (b) gains attributable to the disposition of property and (c) income and gains from a trade or business, but only if such trade or business is a passive activity with respect to the taxpayer or involves trading in financial instruments or commodities.

For individuals, the surtax applies to the lesser of net investment income and the excess of modified adjusted gross income (AGI) over $200,000 (or $250,000 if married filing jointly). For estates and trusts, the surtax applies to the lesser of undistributed net investment income and the excess of AGI over the threshold for the highest income tax bracket ($11,950 in 2013).

Continue reading this income tax article in Accounting Today.