With the end of 2010 approaching, many are wondering whether the Bush tax rates, particularly the preferential 15 percent capital gain and qualified dividend rates, will be extended past 2010. The Bush tax cuts are scheduled to "sunset" after Dec. 31, 2010. As of Dec. 8, the Senate and the House had not agreed on any legislation that would extend the tax cuts. If Congress does not act before the end of the year, the tax rates in effect prior to the Bush tax legislation will return beginning Jan. 1, 2011 ("the pre-Bush rates"). As a result, many U.S. taxpayers will face higher tax bills for income earned after Jan. 1, 2011.

In addition, the U.S. estate tax continues to be an area of uncertainty. As a result, it has been difficult providing estate planning advice to individuals. Like the federal income tax rates, if Jan. 1 arrives without any legislative action on the U.S. estate tax, many individuals will face significantly higher U.S. estate taxes.

It is possible that legislation will be passed that temporarily extends the Bush tax cuts. Democrats and Republicans disagree on whether the pre-Bush rates should be extended for all income levels or just middle-income earners.

Most Democrats propose that the tax cuts expire for those individuals who earn more than $200,000 per year ($250,000 for joint filers). Republicans, on the other hand, would like the tax cuts extended across the board. Another proposal, backed by Senate Finance Committee Member Charles Schumer, D-New York, would extend the tax cuts for those making less than $1 million, but many Democrats are not in favor of such a high threshold.

On Dec. 6, President Obama announced that the administration and the Republicans arrived at a compromise that would extend the Bush-era tax cuts. It is unclear at this time whether this plan will make it through the House and the Senate. Although details of the agreement have yet to be released, its key provisions are described in a Fact Sheet released by the White House. Notably, the compromise would provide for a two-year extension of the Bush tax cuts for everyone. The bipartisan agreement also would reinstate the estate tax with a $5 million exemption amount and a 35 percent top tax rate. The agreement also includes a one-year payroll tax cut for employees, an extension of some stimulus tax provisions for middle-income earners and tax incentives for businesses.

If the current rates are allowed to expire and no legislation is passed enacting different rates, there will be two federal income tax brackets in excess of the current top rate of 35 percent. The brackets include 36 percent for married and filing jointly with taxable income between approximately $237,300 and $382,650, and 39.6 pdercent for married and filing jointly with taxable income over approximately $382,650. In addition, dividends would no longer be taxed at the preferential 15 percent tax rate and would be taxed as ordinary income. The long-term capital gain rate will return to the pre-Bush rate of 20 percent.

If Congress does not act on the U.S. estate tax by the end of this year, the top estate tax rate will be 55 percent and the exemption amount will be $1 million as of Jan. 1. In 2001, President Bush amended the estate tax law to gradually increase the estate tax exemption amount and reduce the top estate tax rate over the last 10 years so that in 2009, the estate tax exemption was at an all-time high of $3.5 million with a top rate of 45 percent. In 2010, the Bush changes repealed the U.S. estate tax, which some suggest will cost the U.S. Treasury billions of dollars in lost revenue unless an estate tax is enacted retroactively for 2010. Such retroactive legislation becomes more unlikely as we reach the end of the year.

The last few weeks of this year should be an interesting time for tax proposals and debates in Congress. Some have suggested that the income tax rate issues may not be resolved until the very last days of 2010. In addition to the income tax rate changes and estate tax legislation, Congress must also decide whether to address the alternative minimum tax (AMT) exemption amounts, as it has done in past years, and also whether to retroactively extend a number of tax provisions that expired at the end of 2009 (e.g. research credit for businesses, standard deduction for property taxes, etc.).

The agreement reached by President Obama and the Republicans was certainly a step toward change, but the Senate and the House must agree and take action to pass legislation. If Congress does not take action, many individuals could be paying higher incomes taxes starting in 2011, and estate planning may become more important for a greater number of individuals if the exemption amount remains at $1 million.

Marla Waiss is a senior associate at Hodgson Russ LLP. She can be reached as mwaiss@hodgsonruss.com