Planning Notes - November 1, 2010 - Planning for Largest Tax Increase in U.S. History

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The 2001 and 2003 Tax Acts created the largest income tax and estate tax cuts in U.S. history. These tax cuts are set to expire at the end of this calendar year, which will trigger the largest tax increase in U.S. history effective as of January 1, 2011. Specifically, the income tax rates in effect in 2000, adjusted for inflation, will return as well as the estate tax regime as it existed prior to 2001.

There are three main proposals being considered by the Obama Administration and Congress. The first proposal is to extend the current rates for those taxpayers with incomes of less than $250,000, meaning that the pre-2001 rates will come back only for those taxpayers with incomes of $250,000 or more. The second proposal is to extend the current rates for all taxpayers for an indefinite period of time. The third proposal, which is more of a bandaid approach, would extend the current rates for a year while debating a long term solution. Congressional approval will be required for any of these proposals to become law, and, given the current political climate, that may be difficult to achieve. Accordingly, it is prudent to plan for the expiration of the 2001 and 2003 tax cuts as of December 31 of this year.

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