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 various proposals 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.