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Reese Henry & Co

Year-End Planning — Down To The Wire

Now that the election is over, can Congress come together and act on some timely tax issues before the end of the year? We are only weeks away from the scheduled expiration of the Bush-era tax cuts and the uncertainty of whether we will fall off the "fiscal cliff" is creating significant challenges for year-end planning. If the tax cuts are allowed to expire, individuals will face higher tax rates next year, including:

  • higher income tax rates;
  • higher capital gains and dividend rates;
  • higher estate tax rates.

Congress has three options: extend all tax cuts, extend certain tax cuts or allow for the expiration of all cuts. Give us a call so we can discuss how these tax changes affect you. Below is a summary of the impending changes.

Expiration of Bush-Era Tax Cuts

Federal tax rates increase across the board
The lowest federal tax bracket, aside from individuals who pay no income tax, is currently 10%. If the tax cuts expire, the lowest bracket will revert back to 15%. Most other brackets will increase by 3%, and the current top tax bracket of 35% escalates to 39.6%.

Capital gains/qualified dividends
Under the Bush tax cuts, the maximum tax rate on long-term capital gains and qualified dividends was reduced to 15% for most taxpayers. If the tax cuts expire, individuals in the lowest tax bracket would pay 10% on long-term capital gains; everyone else will pay 20%. The tax rate applied to qualified dividends will be the ordinary income tax rate of the filer (up to 39.6%).

Estate and gift tax increases
Currently, the maximum estate and gift tax rate is 35% and the basic exemption from the tax is anything under $5.12 million. In 2013, the rate on large estates as well as lifetime gifting is scheduled to jump back to 55% and the estate tax exclusion drops to $1 million. This results in a large increase in the number of people affected by the estate and gift tax.

Health Care Tax

In addition to the expiration of the Bush tax cuts, starting next year a 3.8% tax is imposed on net investment income. The revenues generated from this tax go to the Medicare Trust Fund. Although it only applies to the net investment income of individuals with income over $200,000 and married couples with income over $250,000 (as well as trusts and estates) it may be wise for some taxpayers to recognize gains on appreciated assets in 2012, as opposed to waiting until next year.

We look forward to hearing from you. Please look for our tax legislation updates on this important and timely topic in the upcoming weeks.

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Reese Henry & Company
Phone: 970.925.3771  |  Email:
Aspen Office: 400 East main Street Aspen, CO 81611
Carbondale Office: 0326 Hwy. 133, Suite 200 Carbondale, CO 81623

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