The following is just a synopsis of 2 great articles discussing the probable changes if Washington does not extend Bush-era tax cuts. Full articles are available from the source.
Preparing for ‘Taxmageddon’ (from SmartMoney)
Article synopsis only
Some commentators are calling the end of the income tax cuts “taxmageddon.”
Here’s what you need to know, starting with where we stand right now.
- $5.12 Million Exemption and Flat 35% Tax Rate
For estates of individuals who die in 2012, the federal estate tax exemption is $5.12 million, and so is the lifetime federal gift tax exemption. The estate tax rate on the taxable value of an estate in excess of the exemption is a flat 35%, as is the gift tax rate on lifetime gifts.
- Deceased Spouse’s Unused Exemption Is Portable
The unused unified federal estate and gift tax exemption of an individual who dies in 2011 or 2012 is “portable,” which means it can be passed along to the surviving spouse.
- Unlimited Basis Step-Up for Inherited Assets
For heirs of individuals who die after 2010, the familiar rule that allows the federal income tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect the date-of-death fair market value has been reinstated. That means heirs won’t owe any federal capital gains taxes on asset appreciation that occurs through the date of death — as long as that date is after 2010. The good news: this taxpayer-friendly rule is not scheduled to disappear at the end of 2012.
Expect estate and gift taxes to become major bones of contention during the lead-up to the Nov. 6 general election. What happens in 2013 and after will probably depend on how the election turns out. It may mean a paltry $1 million unified estate and gift tax exemption (versus $5.12 million under the current rules) and a whopping maximum estate and gift tax rate of 55% (versus 35% under the current rules). In addition, the portable exemption privilege would become history.
Preparing for the End of the Bush Tax Cuts (from Wall Street Journal)
Article synopsis only
What to expect:
- Higher Tax Rates – For everyone, not just the top tax brackets. Specifically, the existing 10% bracket will go away, and the lowest “new” bracket will be 15%.
- Higher Capital Gains and Dividend Taxes – Right now, the maximum federal rate on long-term capital gains and dividends is 15%. Starting next year, the maximum rate on long-term gains is scheduled to increase to 20%.
- Harsher Marriage Penalty – Currently, the standard deduction for married joint-filing couples is double the amount for singles. Starting next year, the joint-filer standard deduction will fall back to about 167% of the amount for singles.
- Return of Phase-Out Rules for Itemized Deductions – Before the Bush tax cuts, a phaseout rule could eliminate up to 80% of a higher-income individual’s itemized deductions for mortgage interest, state and local taxes and charitable donations. The rule was gradually eased and finally eliminated in 2010. Next year, the phaseout will be back in full force unless Congress takes action and the president approves.
- Return of Phase-Out Rule for Personal Exemptions – The rule was gradually cut back and finally eliminated in 2010. But it will be back next year barring action in Washington.
- Some Bush Tax Cuts Are Likely to Be Continued – Examples include inflation-indexed alternative minimum tax, or AMT, exemption amounts, the ability to use nonrefundable personal tax credits to offset your AMT bill and the deduction for qualified higher-education tuition and fees.