Make Expiring Tax Cuts Work for You

It has been just a few blessed weeks since April 15, when we all emerged from stacks of 1099s and W-2s and declared ourselves ready to forget about taxes for another year. 

Not so fast. 

The tax cuts put in place during the previous administration are heading for expiration at the end of this year if Congress doesn't act. Almost everyone agrees that at least some of the cuts should be extended, but the right and the left have profound disagreements about how to proceed. 

So what does this mean for you? While you should always rely on a tax professional before making any decisions, here is a general rundown regarding what's at stake. 

What's going on: If the current cuts are not extended, just about everyone will see their income tax rates go up next year. The lowest rate would jump from 10 percent to 15 percent, and the highest from 35 percent to 39.6 percent.

Broadly speaking, Republicans would like to extend the current rates for everyone, or even make them permanent. On the other hand, Democrats, including President Barack Obama, would like to freeze the current rates for most people, but let the rates go up for those earning more than $250,000 in a year. 

How you can prepare: Basically, tax advisors suggest finding ways to earn more this year, while the rates are lower, and have less taxable income next year. If you expect an end-of-the-year bonus, think about asking your employer if you can get the check in December rather than January, for example. On the flip side, ask a tax professional if you should look for deductions that can be put off until next year. If you are going to take a loss on an investment or make a charitable donation, consider holding off until after January 1, so those deductions will reduce your taxable income next year. 

What's going on: A capital gain is the income you earn when you sell an asset that has increased in value, such as stocks or real estate. The Bush-era tax cuts reduced the tax rate on this kind of income to 15 percent (mostly -- there are a few exceptions). If the cuts are allowed to expire, the top rate on most capital gains will rise to 20 percent. 

How you can prepare: As with regular earnings, it may make sense to take capital gains this year rather than next. If you were considering cashing out some stocks or selling a property, ask a tax professional if this year might be the time to do it.

What's going on: The estate tax -- often referred to as the "death tax" -- is paid by heirs who inherit significant assets. Right now, the tax only applies to estates worth more than $5 million, a level that means very few Americans are affected by this tax. However, that threshold is set to drop to $1 million at the end of 2012. Furthermore, the estate tax rate could also jump from 35 percent to 55 percent.

How you can prepare: Even if the exemption drops to $1 million, very few of us need to worry about this one. But if you think you might, ask a tax professional to look at ways to reduce the size of your estate through gifts to intended heirs, charitable donations and the creation of trusts.

What's going on: An assortment of other tax rules are also slated to change at the end of 2012. A provision put in place to fix the so-called "marriage penalty" -- the higher tax bill faced by some married couples in which both partners earn approximately the same amount -- could expire at the end of the year. The child tax credit, currently a maximum of $1,000 per child, is set to drop to $500 next year. And the American Opportunity Tax Credit, which expanded the availability of tuition and education tax benefits, is also scheduled to expire.

How you can prepare: You can't.  But you can call your Congressmen and Senators and tell them what you think.