A slew of tax breaks are expiring and some new taxes taking effect. See what’s in play.
The only thing certain about the tax code these days is, well, the uncertainty of it all. If Congress doesn’t take action before the end of the year, federal tax increases will go into effect next year, raising levies on income, capital gains, dividends, wages, gifts, estates, and more.
Lower tax rates are set expire at the end of 2012
Most observers agree that Congress is going to have a hard time addressing tax and budget issues before the November elections, says Shahira Knight, Fidelity’s vice president of government relations. “More likely, action will wait until a lame-duck session of Congress, or 2013, and that’s unsettling for investors and the markets,” she notes. “It may be a roller-coaster ride as key deadlines approach.”
So where does that leave you as a taxpayer and investor? “A good approach is to be prepared for a range of possibilities, and to start now,” says Jim Buza, vice president of guidance and advice for Fidelity. “That’s really what you should do in any climate, but it’s especially critical now.” To get started, use our tax calculator to the right to estimate how you might be impacted.
The tax cuts enacted by Congress in 2001 and 2003—often referred to as the Bush tax cuts—provided a broad range of tax relief, including lower tax rates on income, long term capital gains, and qualified dividends. We dodged the expiration of these lower taxes back in 2010 when Congress extended the tax cuts for two years (through 2012). Now cuts are set to expire on December 31, 2012, and any action will likely come down to the wire as it did in 2010.
It’s difficult to predict what will happen, but three scenarios are possible:
- All the tax cuts could expire if Congress and the president fail to reach an agreement before December 31. In this case, the new Congress could act in 2013 to reinstate some of or all the tax cuts.
- The tax cuts could be extended temporarily, giving Congress time to act on a permanent solution—possibly by reforming the tax code.
- Some type of compromise could be reached in the lame duck session, with some taxes extended or modified and others allowed to expire
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