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The Bush Tax Cuts: What are They?

During this political season, a great deal of attention is being paid to taxes and how they affect the American people.  Well what exactly are they referring to?  Are 100 million Americans about to fall off a fiscal cliff? A big component of the discussion are the Bush tax cuts, which are set to expire at the end of 2012. Will they be extended again? Many observers acknowledge that a decision is unlikely to happen before the November elections, but it will be interesting to see what gets done when Congress returns to session at the end of the year.

If a decision is made, there are only three options: extension of all tax cuts, extension of cuts for certain income brackets only or expiration of all cuts.

Here is a sampling of some of the areas impacted if the Bush tax cuts are allowed to expire:

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 would revert back to 15%. Other brackets will go back to their original rates, which is an increase of 3% except for the current top bracket of 35%, which would escalate to 39.6%.[ii]
  • Capital Gains/Qualified Dividends
    Through the original cuts, the maximum tax rate on long-term capital gains (gains on assets that have been held for at least one year before being sold) and qualified dividends was also reduced to 15%, with lower income filers not paying any tax. If the tax cuts expire, individuals in the lowest tax bracket would pay 10% on long-term capital gains; everyone else would pay 20% and qualified dividends would resume being taxed at the regular tax rate of the filer (up to 39.6%).Short-term capital gains rates will also increase since they are already tied to the taxpayer’s marginal rate, which is increasing.
  • Estate & Gift Tax Increases
    The tax cuts enacted in 2001 and 2003 originally whittled away at the estate and gift tax until there was no estate tax in 2010. Congress modified that in 2010 so that currently, the maximum estate tax rate is 35% when the owner of a property dies, and the basic exemption from the tax is anything under $5.1 million. The same rate and exclusion amount apply to the gift tax, which stipulates how much a person can gift to others over the course of their lifetime without paying taxes on the money.

 In 2013, the rate on those large estates as well as lifetime gifting is scheduled to jump back to 55% and the exclusion drops to $1 million. That would result in a large increase in the number of people affected by the tax.

Time to Prepare

It’s never too early to prepare now for tax moves to come. Many advisors and attorneys may become overwhelmed as the year goes on and as investors, business owners and taxpayers become increasingly concerned.

 For estate planning and purposes, however, the estate and gift tax changes may have a profound impact on the amount of wealth that can be transferred to others without being taxed. Therefore, individuals should consider making any wealth transfers or gifts to family members before the end of 2012, while the exemption still stands at $5.1 million.

 “The Bush Tax Cuts: What are They? (Part 2 of 2),” will explain potential tax cuts to the Child Tax Credit and the Marriage Penalty as well as new taxes to also consider when planning for wealth.

By: Rob Rumley

Rob Rumley may only transact business in states where he is registered or excluded or exempted from registration.  Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where they are not registered or excluded or exempt from registration. Rob Rumley is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley Smith Barney in Atlanta, GA.  The information contained in this news release is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. Asset allocation does not g uarantee or protect against a loss.  Morgan Stanley Smith Barney offers a wide array of brokerage and advisory services to its clients, each of which may create a different type of relationship with different obligations to you.  Please consult with your Financial Advisor to understand these differences. Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. Please consult your tax advisor for matters involving taxation and tax planning and your attorney for matters involving trust and estate planning and other legal matters. The views expressed herein are those of the author and may not necessarily reflect the views of  Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.

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