What’s the BIG DEAL about the Bush Era Tax Cuts?

“Bush era tax cuts,” it is a term you may have heard as of late from your favorite political pundit, presidential candidates, or around the water cooler. Like many, you may have asked yourself, “Self, what are these tax cuts of which many are speaking, and more importantly how do they effect me?”

The phrase “Bush era tax cuts” or “Bush tax cuts” is a reference to two pieces of legislation passed under President George W. Bush or Bush 43 (as oppose to Bush 41, George H.W. Bush). Those two pieces of legislation are the Economic Growth and Tax Relief Reconciliation Act of 2001, and the Jobs and Growth Tax Relief Reconcilation Act of 2003. Both of these laws were born in controversy as they were both passed through use of reconciliation procedures.

So why are we talking about acts from 2001 and 2003 today? The laws were both passed with sunset provisions, or expiration date. Under the original sunset provision, the laws would have expired at the end of 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed into law by President Barack Obama, extended the tax cuts for two more years.

Now it is nearing the end of 2012, and trying to divine what will actually happen, especially during a presidential election year, is creating a great deal of chatter.

While there are several facets to the tax cuts, let’s focus first on those pertaining to lowering the tax rates for most Americans. While some are calling for making all the provisions of these acts permanent, some want only an extension, as was done in 2010. Still others want to tweak or overhaul the original laws, or at the extreme, let them lapse completely. An example of change is the Middle Class Tax Cut Act, which preserves many of tax cuts, as the name suggests, for the middle class.

Given the implications in taxes, people are naturally going to talk about this. However, estate planning attorneys are waiting with bated breath to learn the fate of the estate tax. Prior the tax cuts, married couples could pass on up to two times the federal estate tax exemption (which was $1,000,000.00 dollars at the time) by including “AB Trusts” or “ABC Trusts” in their estate plan. The Bush era tax cuts increased the exemption amount to $5,000,000.00, effectively removing the need for AB Trusts, protecting many assets for top earners. The Middle Class Tax Cut Act, if successful brings resolution to the income tax issues, however it does not address the estate tax issues.

We will continue to wait and see what Congress and the President do. Until then, the political pundits, presidential candidates, chat around the water cooler will continue to speculate.

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