In 2001 and 2003, Congress enacted temporary tax cuts that pushed tax rates to historic lows and provided other tax incentives.
But the key word is "temporary," and the end of the tax breaks is now in sight. Unless Congress acts, the tax code will return to pre-2001 statutes Jan. 1, 2011.
The original cuts were approved in large part because the U.S. Treasury was running a surplus back then. However, today's budget deficit, combined with the politicized atmosphere of a midterm election year, mean that any changes before the existing tax laws sunset are not sure things.
So, what exactly will you encounter if next year arrives without any alterations to the current tax law? You'll face higher income tax rates, more taxes on investment income, fewer tax breaks for families, the return of so-called stealth taxes and a tougher estate tax.
What can you do to prepare for the worst-case tax increase scenario? In some instances, quite a bit if you start your tax planning now. In other tax situations, not so much. But you might be able to make adjustments elsewhere to offset the changes if tax cuts expire.