As we previously wrote about during the summer, what are referred to as the “Bush Era Tax Cuts” are set to expire at the end of 2012 unless Congress and the President act before the end of the year…

And even if Congress and the President do act, whether they will retain the cuts for all taxpayers or for just those with lower levels of income remains to be seen.

Assuming the tax cuts are allowed to expire here is what you can expect:

• Top marginal rate will go from 35% to 39.6%
• Qualified dividends from 15% to 39.6%
• Long-term capital gains from 15% to 20%
• Estate/Gift Tax
  • Life-time exemption amount goes from $5,120,000 to $1,000,000
  • Top rate goes from 35% to 55%
  • Limits on Itemized deductions and on the “personal exemption” will be re-instated
  • The standard deduction for married couples will be reduced from 200% of the deduction for single taxpayers to 167%.

And a “new tax” under the Obama Health Care Plan

• Taxpayers will be required to pay a 3.8% “Medicare tax” on their net investment income. The current view is that this is not an income tax and therefore you will not be able to offset this tax with foreign tax credits. It is not yet clear what will be included in the concept of net investment income, but it may well include gain on the sale of a personal residence.

The following link is to the Congressional Research Service and provides details on the tax cuts and policy considerations.  http://www.ustaxfs.com/wp-content/uploads/2013/05/expiring-tax-provisions-2012.pdf

Planning considerations:

1. Realise long-term capital gains before the end of 2012
2. Defer realization of capital losses until 2013—will offset what may be higher taxed gains.
3. Make Gifts in 2012  use the higher $5 million exclusion amount as it’s a significant change to $1 million

Caution: Do not make decisions solely for tax reasons…your actions should fit with your personal goals and needs. The tax impact of these decisions should just be a “factor” you consider.