Taxpayers prepare for income and estate taxes

Next week lawmakers have to take care of the estate and income tax issue. A year ago, many tax advisers and tax preparers were sure that Congress would mend the estate tax before the year came to a close. However, a decision was never reached, which caused the estate tax to lapse in 2010, according to the the New York Times.

There are only five weeks left to address the estate tax before the holiday recess. If Congress does not come to a decision on the estate and income tax issues, then they will revert to the 2001 level, which is a 55 percent tax rate for individual estates larger than $1 million. This will force seven times the number of estates than usual to file estate tax returns in 2011, according to the Tax Policy Center research group. The center also reported that the individual exemptions were $3.5 million and the rate was 45 percent in 2009. Furthermore, 108,000 estates would file returns under the lower exemption and 44,000 would pay tax with the new rates.

With no estate tax for a single year, death-related taxes could be a problem. Assets would not be valued when that person passes away. Their heirs would have to figure out how much the assets' appreciated value is and pay capital gains tax on that amount.

Well-off individuals would have to pay a higher amount to minimize the portion of their estate over $1 million for an individual or $2 million for a couple.

“This is a very expensive return to prepare,” David Kron, a partner and practice group leader at Ruden McClosky told the New York Times. He also commented that an estate tax return could literally take hundreds of hours to complete.

It is possible for income taxes to increase next year as well. If income tax rates in the top bracket rise to 39.6 percent, people could get a higher charitable deduction by waiting to make their gifts in January.

Executive vice president of Signature, Susan Colpitts, suggests that people should hold off on purchasing large gifts because the potential of a higher rate next year would mean a higher charitable deduction, and donations would only cost 60 cents on the dollar.

Capital gains taxes could also increase up to 20 percent from 15 percent. Investors with large capital gains in securities or private companies could profit from selling them and paying the current lower tax. However, on $1 million of gains in a stock, they would have to pay back $150,000 in taxes today and hope to re-earn the money.

Though times are in a state of confusion and uncertainty right now, one of the best things to do is to visit a tax preparer. This way, Americans can do their best to plan what is right for them.

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Liberty Tax Service provides computerized income tax preparation and electronic filing. Each tax office offers customers audit assistance, a money back guarantee, and free tax return checking.