Federal Tax Planning for the “Fiscal Cliff”

The American stock market has been going down for several days now since the sprouting of fiscal cliff debates after the election. Proponents argue that, along with less government and federal tax spending, the fiscal cliff will help cut down federal budget deficits by the end of 2012 and early 2013.

However, many critics warn that the expiration of federal tax cuts and the introduction of new federal taxes in 2013 will cause another economic recession in the future.

If the fiscal cliff takes effect, US taxpayers will witness a rise in the federal taxes. For instance, the top federal tax bracket for income will rise from 35 percent to 39.6 percent, while top capital gain rates will rise to 20 percent from the present 15 percent. The federal tax for employee payroll goes back to 6.2 percent as soon as the payroll tax holiday expires by the end of December and dividends will now be taxed as ordinary income. Moreover, estates worth over $1 million will be taxed at 55 percent from the present 35 percent.

With the impending federal tax increases at the turn of the year, there are several federal tax planning strategies to help tax payers cope with the possible federal tax rate changes after the implementation of the fiscal cliff. Investors and taxpayers are advised to take advantage of the federal tax programs before they expire, convert to Roth IRA, invest in municipal bonds, and sell appreciated assets in 2012 in order to avoid federal tax rate gains and Medicare surtax in 2013.