Chances are you have already heard that a bipartisan agreement was reached on New Years Day which averts the significant tax increases and spending cuts demanded by the so-called "fiscal cliff." The agreement certainly went down to the wire, with the Senate passing a bill on the last day of the year and the House passing the same bill the following day. Up until the end it was unclear if a compromise could be reached, as House leaders initially claimed that they would amend the Senate bill and send it back to that chamber. In the end, however, a vote was taken on the Senate bill without any changes, passing with support from members of both parties.
The compromise legislation does not resolve all of the issues in disagreement between the parties. More negotiation and legislation will be needed in the coming months to settle those other matters.
The Basics of the Deal
A few aspects of the compromise have direct bearing on long-term planning for New Yorkers. Perhaps most obviously, the estate tax levels have been set, presumably for the indefinite future. Per the agreement the highest tax level will be 40%, with a $5 million exemption level pegged to inflation. That is a far higher exemption level and lower rate than would have taken effect if the fiscal cliff proposals were enacted. It is also better for opponents of the tax than the main proposal offered by the Obama Administration of a 45% rate and $3.5 million exemption level.
Additionally, the agreement makes tax changes to retirement accounts that many community members use as part of their long-term financial planning. The new law will convert 401(k)s into Roth IRAs. Essentially, the change alters when the funds put into these special retirement accounts are taxed. While 401(k) contributions can be deducted right away (providing a tax savings on the front-end), Roth IRA contributions cannot be deducted. Conversely, while a Roth IRA withdrawal is not taxed, a 401(k) withdrawal is taxed. Lawmakers are pushing residents away from 401(k)s so that more tax revenue is collected in the short-term instead of the long-term.
In addition, many different changes were made on tax rates in general. The 2% payroll tax reduction was allowed to expire, which will affect virtually all residents. The income tax on high-income earners ($400,000 for individuals and $450,000 for couples) will rise, and the capital gains tax on those same high-income households will also rise.
If you have any questions about how these federal legal changes might affect your estate planning in New York, be sure to contact our office to see how we can help.