Epic failure in Washington is causing epic uncertainty for taxpayers.
This week, Congress's special 12-member deficit-cutting committee failed to agree on even a broad outline for addressing the U.S.'s fiscal woes. It marked the third year in a row that taxpayers headed into December with major tax-code issues unaddressed.
Now tax experts don't expect action on the most important issues—income-tax rates, capital-gains rates, estate-tax exemptions and rates, and the alternative minimum tax—until after next year's election. Unless, that is, something happens in the economy to move lawmakers to act. "If the markets insist, Congress will respond," says Michael Graetz, a professor at Columbia University Law School and a former top Treasury official.
Lawmakers have a lengthy to-do list. The 2% Social Security payroll-tax cut for employees expires at the end of 2011. So do a host of other provisions, including a fix to keep the alternative minimum tax from expanding to millions more taxpayers in 2012, and an extension of the popular IRA charitable contribution for people older than 70½.
Other changes are set to take effect at the end of next year, including the expiration of the tax cuts enacted in 2001 and 2003. The top tax rate on wages would reset to 39.6% from 35%, and the top rate on long-term capital gains would rise to 20% from 15%. The special 15% rate on dividends would lapse, as would the current generous estate-tax provisions. As many 10 million lower-income families and individuals would also be restored to the tax rolls, according to the nonpartisan Tax Policy Center.
How can individual taxpayers cope with this chaos? Here are our best suggestions for moves to make before the end of the year as well as longer-term issues to consider.