An Overview of Current Taxation and Possibilities for the Future

What is known about 2012:

• Ordinary income tax rates are at 10%, 15%, 25%, 28%, 33%, and 35%.
• Capital gains apply to taxpayers in the 25% bracket and above – the dividend rate is 15%.
• Gains on artworks held for more than a year are taxable at 28%.
• There are no tax incentives for charitable IRAs.
• There is no itemized deduction limitation or personal exemption phase-outs.
• The gift and estate tax exemption is $5,120,000 per person and the tax rate is 35%. The exemption can be used during life and/or at death. Portability of unused exemption is possible.

What is known about 2013:

• Ordinary income tax rates are at 15%, 25%, 28%, 31%, 36%, and 39.6%.
• Capital gains and qualified dividends are taxed at 20%.
• Gains on artworks held for more than a year are still taxable at 28%.
• No tax incentives for charitable IRAs
• There are limitations on itemized deductions for upper-income taxpayers. Charitable and other itemized deductions will be reduced by 3% of the amount by which AGI is greater than statutory limits, but not by more than 80% of the otherwise allowable deductions
• There is a personal exemption phase-out for upper income taxpayers.
• If Congress takes no action before 2013, then the gift and estate tax exemption will be $1 million and the rate will be 55%. The generation skipping transfer tax will also be $1 million. Portability will not apply.

President Obama’s Tax Proposals:

• Reinstate 36% and 39.6% tax rates for upper income taxpayers.
• Qualified dividends would be taxed as ordinary income for upper income taxpayers and allow the current 15% reduced tax rates to expire at the end of 2012.
• Tax net long-term capital gains at 20% for upper income taxpayers.
• Tax a partner’s share of income on an investment services partnership interest as ordinary income
• Reduce the value of some tax expenditures.
• Limit tax value of specified deductions from AGI.
• Reinstate limitation on itemized deductions and the personal exemption phase-out for upper income taxpayers.
• Make the estate, gift, and GST tax laws that were in effect in 2009 the permanent rules. The exclusion amount for estate and GST taxes would be $3.5 million and the gift tax exclusion would be $1 million. The tax rate would be 45%. Also make portability permanent.

Republican Candidate Tax Proposals:

• Newt Gingrich: Stop 2013 tax increases to create economic stability and move towards an optional 15% flat tax.
• Ron Paul: Lower taxes, abolish income and estate taxes, immediately repeal capital against taxes, let Americans claim more tax credits and deductions, restrain federal spending.
• Mitt Romney: Reduce income tax rates for Americans by 20%, eliminate the estate tax, aim for a conservative overhaul of the tax system to create lower, flatter rates on a broader base.
• Rick Santorum: Only have two tax rates – 10% and 28%, eliminate the estate tax, lower capital gains and divident tax rates to 12%, retain deductions for charitable giving, home mortgage interest, healthcare, retirement savings, and children.

See Conrad Teitell, Washington Legislative Climate for Charitable and Estate Planning, Trusts and Estates Newsletter, Mar. 26, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.