Estate Planning Uncertainty in An Election Year

Estate planning typically requires a thorough understanding of the tax laws that will directly impact the choices you make for your plan. Unfortunately, in an election year, uncertainty surrounds the fate of many tax laws, making estate planning more difficult. That is not to say that you should be complacent this year — on the contrary. When the future of tax laws is uncertain, consulting with your estate planning attorney becomes even more important. With many current tax exemptions and deductions set to expire, you may wish to take advantage of them now. Among the many tax laws that are currently set to expire or change are the following:

Estate Tax Exemption: Currently at an all time high of $5 million, the exemption is scheduled to drop back down to $1 million next year.

Gift Tax Exemption: Also currently at and all time high of $5 million and set to return to $1 million for 2013.

Estate Tax and Gift Tax Rates: Currently set at a maximum of 35{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9}, both will revert to a maximum rate of 55{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9} on January 1, 2013 absent action by Congress.

Payroll Tax Cut: Adds about $40 to the average worker’s take home pay. Congress extended the tax cut through 2012, but its future is uncertain.

Tax Rates: President Bush implemented a tax rate cut on income taxes that is still in effect putting the rates at 10{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9} – 35{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9}. If they expire, individual tax rates will return to 15{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9} – 39.6{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9}.

Alternative Minimum Tax: The AMT was originally intended to prevent high income taxpayers from avoiding taxes; however, it was not indexed for inflation, resulting in more taxpayers being required to use the AMT over the years. A “patch” has been used by Congress each year to fix this, but the “patch” doesn’t extend to 2012 at this time. As many as 31 million taxpayers are expected to be impacted if another patch is not forthcoming.

Tax Deductions and Credits: Numerous temporary deductions and credits have been adopted to help ease the financial stress of the recession. There is no guarantee that these will be extended.

Investments: The maximum rate for long-term capital gains could rise to 20{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9} from 15{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9} unless Congress acts before the end of the year. Stock dividends, currently taxed at a maximum of 15{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9}, will also be taxed as ordinary income, with a top tax rate of 39.6{5db71d874b98728b0b45e030f0931b53aac79686736ebc746cee235fd3432df9}