Today we’ll discuss individual tax provisions which will expire on December 31, 2012. First rates for all taxpayers including the lowliest are going up. The 10% rate will become 15% for low income individuals. They will also lose the earned income credit and their withholding taxes will go up from 4.2% to 7.125%. And if the rent their apartment and don’t own a home, their standard deduction will be lowered as well.

The middle class gets a tax increase as well. The 25% rate goes to 28%, 28% to 31%. They also get an increase in payroll taxes. The marriage penalty will be back. And they will suddenly be subject to the alternative minimum tax. They lose the Child tax credit, the higher education deduction, the dependent care credit, the energy efficient homes credit, and the adoption credit.

But what about the rich? Well their rates go up from 33% to 36% and 35% to 39.5%. However for dividends, their rates will go up from 15% to a maximum rate of 39.5% (plus the new Obamacare tax of 3.8%). The capital gains rates will go up from 15% to 20% (plus the new Obamacare tax of 3.8%). The phase out of itemized deductions and standard deductions will come back again. The marriage penalty will hit them as well. All in all everyone suffers when we go over the fiscal cliff.

Estate Taxes (Death Taxes). The exemption from estate taxes goes down from $5 Million per person/ $10 Million per couple down to $1 Million per person and $2 Million per couple. That means that if a person owns a small business or farm, has socked away a few hundred thousand in the 401(k), owns his own home, and has some money in the bank, he’s going to owe death taxes.

Some estimates are that if these changes are implemented the Government revenues will go up $482 Billion. That averages $1,333 per American. The 50% who don’t pay taxes, will in many cases now start to pay taxes. That figure is misleading since anyone who earns $100 pays payroll taxes. So, even those who “pay no taxes” will have a tax increase due to expiring laws.

PLANNING TIPS:
If you have illiquid assets the rest of 2012 may be a good time to sell them or give them to family members in order to take advantage of lower capital gains rates and higher gift tax exclusion for 2012. Additionally if income can be recognized in 2012 instead of 2013, it might be a good year to do that. I would say, plan deductions for 2013 since rates are higher, but with the possibility of the phase out of itemized deductions and the resurrection of the alternative minimum tax, that might not be advisable and you should have someone run the numbers for you.