One of the greatest areas of uncertainty facing American taxpayers is what will happen with the tax code.
Here is a synopsis of how different—but plausible—scenarios could develop:
• The current “Bush tax cuts” are allowed to expire at the end of 2012. If this happens, rates return to 2001 levels—an increase for virtually all taxpayers, with the top rate going from 35% to 39.6%. Tax rates for long-term capital gain would go up to a maximum of 20% versus a current top rate of 15%, and qualified dividends would be taxed as ordinary income.
• Estate- and gift-tax rules change dramatically. Under current rules, each individual can pass on up to $5,120,000 free of gift or estate tax and the top rate is 35% on any amount that is taxable. That would drop to $1 million with rates as high as 55% if the current law expires. Alternative proposals would continue higher exemptions and lower rates.
• Rates are increased for certain higher income taxpayers. Multiple proposals are on the table, with thresholds ranging from $250,000 to $1,000,000 for a married couple filing jointly.
• Rates go down across the board. Again, there are different proposals out there that would implement this differently, with top income-tax rates in the mid to high-twenties.
What does all this tell us?
As you make your year-end giving plans, the best course is to focus on current realities and be creative in taking advantage of the opportunities they present.