A step back amid uncertainty

This year has certainly brought plenty of questions about how politicians are able to meet their goals. No matter what your political views, I think most of us agree that politics is getting in the way of good reasoning and effective decision-making.

We began this tax season wondering what the fate of the Bush-era tax cuts would be. Now that we are further into the year, it isn’t looking as if there will be a resolution. Since the two political parties are far apart on most of the tax-cut decisions, we have to wonder how to plan for next year and the years ahead.

As a little background, over the last 10 years, tax cuts have been in place to lower the tax many people pay. Examples include reduced individual income tax rates, marriage penalty relief, eliminating limitations on itemized deductions, and higher child tax credits, to name just a few. Many people experienced the reduced tax rates on capital gains and dividends. These, too, are scheduled to sunset after 2012. There remains uncertainty about alternative minimum tax and the health care act provisions.

The list of tax cuts that will sunset is a long one. It can affect teachers and people using education-related tax incentives, people adopting a child, and people with higher-end incomes.

So what should one do to plan for the future?

For the time being, you have to deal with the knowns, not the unknowns. That means understanding that there is a chance many tax cuts will, in fact, sunset and that the future will probably hold more potential for higher tax rates. This makes 2012 a very important tax year for you.

Pay attention when you hear about a tax law being passed. Make well-advised decisions based on what you know will happen in 2012. Understand that the capital gains rates might change next year and decide how this could affect your investment decisions. Realize that if you are an individual making more than $200,000 ($250,000 if married) you might pay additional tax on your investment income. Talk to your investment advisors to determine what actions to take this year, next year, and beyond.

Being well advised by the financial people you trust will go a long way toward minimizing the impact of all of these potential changes in the tax law.

IRS Circular 230 Disclosure: To ensure compliance with Treasury Department Regulations, we advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.

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