Does the current economic climate leave your head spinning, wondering how tax and budget changes will affect you and your family? Do you ever wonder how our country got into the financial mess it is in, or why?

President Obama is focusing on life estate and capital gains taxes, in the budget recently proposed to Congress, targeted two specific tax items: estate taxes and capital gains taxes. The proposed estate tax changes target mainly more affluent people with larger estates, while capital gains tax reforms mostly impact wage earners. The taxes are still up for debate, you can be sure there are changes coming, some of which will undoubtedly affect many Americans.

Estate Tax Restrictions

Currently, estate tax rates are set at a maximum of 35 percent and the individual and married couple exemptions are $5 million and $10 million, respectively. For most of us, we don’t have to worry about this tax, as less than one percent of people who die have estates that exceed these limits. The gift tax and generation skipping transfer (GST) tax limits are also at $5 million with a 35 percent tax rate. However, these estate tax laws are set to expire at the end of 2012 unless Congress passes new laws.

In his budget, the President wants estate tax exemptions to return to 2009 levels, which would help reduce the national deficit between 2012 and 2021 by $963 billion. In 2009, both the estate and gift tax rates were set at 45 percent, with estate tax exemptions limited to $3.5 million and gift tax exemptions limited to $1 million.

Capital Gains Tax Increase

At present, the 15 percent capital gains tax rate will remain until 2012. This may change in 2013, however, and the effect could impact over half of the American population. The President has proposed maintaining the current rates for people in lower income brackets, and increasing the rate to 20 percent for individuals who earn over $200,000 a year, or couples who earn more than $250,000 a year.

Preparing for Change

No matter what the outcome of the tax changes for 2012, wealthier Americans should be prepared. Choosing to practice proactive estate planning cannot be underestimated, especially in these uncertain financial and legislative times.

If you need to create or revise your estate planning documents, contact an experienced estate planning attorney for advice about your legal rights and options, specifically regarding protection against estate and capital gains taxes.