When it comes to Congress’s resolution to avert the fiscal cliff, there will be a negative impact for many Americans, but it isn’t all bad news. Congress did extend and, in some cases, even increase several protections and exemptions that will benefit quite a few families.
Despite a hike in the top federal estate tax rate from 35% to 40%, the amount of the exemption was boosted permanently to $5 million and adjusted annually for inflation. In 2013, that equates to a $5.25 million exemption. If Congress and the President had failed to address the estate tax issue, the exemption would have dropped to $1 million, and it would have lost its portability—a provision that allows the unused portion of an estate tax exmption to pass to a surviving spouse. This essentially doubles the exemption limit in many cases.
Standard deductions also went up: Married couples can now claim a $12,200 deduction. That number increase to $13,400 if one spouse is 65 or older, and $14,600 is both spouses are over the age of 65. In 2013, 401(k) annual contribution limits are also up, increasing to $17,500 for those under the age of 50, and $23,000 for the over 50 crowd. Even IRA contribution limits have increased $500, up to $5,500 now, with a $1,000 annual catch-up bonus for those over the age of 50.
The bottom line is that it’s a mixed bag, with tax and savings changes both positive and negative for your finances, and it makes sense to plan for the future with your financial advisor.