By now you’ve probably  heard of the “fiscal cliff,” a term coined by Federal Reserve Chairman Ben Bernanke that describes what could happen if no action is taken by Congress against the expiration of tax rates and spending reductions.  Some of the highlights of what tax effects we could see include:

• The Bush tax cuts will expire, increasing the highest tax bracket from 35% to 39.6% (43.4% including the additional 3.8% surtax).
• The payroll tax holiday is ending, increasing the employees’ portion of FICA to 6.2%.
• Long-term capital gains rates will increase from 15% to 20%.
• Qualified dividend income rates will increase from 15% to 39.6% (43.4% including the additional 3.8% surtax).
• The estate and gift tax exclusion will decrease from $5,120,000 to $1,000,000.
• The highest estate, gift and generation-skipping transfer (GST) tax rate will increase to 55% from 35%.
• If not patched retroactively, alternative minimum tax (AMT) exemptions will drop to 2000 levels.
• Exemption phase-outs return.
• Itemized deduction phase-out returns.
• Medical itemized deductions will be subject to 10% of the adjusted gross income (AGI) limit from 7.5%.
• Bonus depreciation expires.
• American Opportunity Tax Credit expires.
• Higher education loan interest deductions will be limited.
• Child tax credit decreases to $500 per child.
• Child and dependent care credit decreases.
• FSA contributions will be limited to $2,500.

In addition to expiring tax cuts, there are also tax increases that will go into effect in 2013, such as:

• Hospital Insurance Tax of 0.9% for taxpayer’s married filing jointly with combined wages in excess of $250,000
• Additional 3.8% surtax on certain types of unearned income in excess of $250,000 for married filing jointly taxpayers ($200,000 for other taxpayers).  The surtax will apply to all passive income which cannot be offset by passive losses.

Given all of these impending changes, these are just a few things you may consider in order  to maximize your tax savings:

• Converting retirement plans to Roth IRAs during 2012.
• Realize long-term capital gains at the lower 2012 tax rate.
• Accelerate income into 2012 and defer expenses into 2013.
• Maximize gifting.
• Move some of your taxable investment portfolio into municipal bonds.

ORBA advisors would be happy to discuss these and other possible savings opportunities with you at your convenience.  Contact us at 312.670.7444 to schedule your consultation.