Gallet Dreyer & Berkey, LLP | Congressional Gridlock Creates Tremendous Uncertainty for Year-end Tax Planning
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Congressional Gridlock Creates Tremendous Uncertainty for Year-end Tax Planning

09/08/2012 | Fall 2012 Newsletter
Caution: the following article may sound all too familiar!

As the year end approaches, the American taxpayer faces the same uncertainty presented at the end of 2010 — will Congress address the changes that are about to take place to our system of income, gift and estate taxation? Just about two years ago, I wrote an article for this Newsletter — much of what I am about to say, was said then. 

Absent Congressional action:
  • Income tax rates for ordinary income will increase to a maximum rate of 39.6% (from 36%).
  • The income tax rate on qualified dividends will increase from 15% to 39.6%.
  • The income tax rate on capital gains will increase from 15% to 20%.
  • The maximum estate and gift tax rate will increase to 55% from 35%.
  • The current effective exemption for otherwise taxable transfers for gift or estate tax purposes will decrease from the current $5,120,000 to $1,000,000.
  • In addition, many of the other so called “Bush Era Tax Cuts” will expire.

In 2010 when Congress last addressed these very same issues, they punted — they extended the life of most of the income tax cuts that were about to expire for two years and, in their wisdom, increased the effective exemption on taxable gift and estate tax transfers to the current $5,120,000.

As if the foregoing potential increases were not cause enough for concern, some American taxpayers will be faced with a new tax (actually called a surtax) of 3.8% on the lesser of their investment income (a defined term which includes gain from the sale of a personal residence in excess of the exemption) or the excess of their modified adjusted gross income over a specified threshold amount ($250,000 for joint filers, $125,000 for married individuals filing separate returns and $200,000 for everyone else). There are special rules for trusts and estates. 

What does all of this mean?
Under the wrong circumstances a dividend that would have been taxed at 15% if received in December 2012, could be taxed at an effective rate of 43.4% if received in January 2013 and a family that loses a loved one in January 2013 who has a taxable estate of $5,000,000 who lived in New York State at the time of their death will inherit $1,653,400 less than they would have had this person died in December 2012. 

How will Congress address these issues in 2012?
We urge our clients and the readers of this Newsletter not to be passive, but instead to schedule an appointment to meet with us to see if there is something that can be done before year end to take advantage of our current tax laws.