At the end of this year, a series of tax cuts implemented by George W. Bush and his administration between 2001 and 2003 are set to expire. In what now seems like an entirely different era, the cuts were approved at a time when the U.S. government budget was in a surplus and the motivation was to return some of this excess to taxpayers and jump start a tepid economy.

Also at that time, a lack of a clear majority to approve the cuts was a concern. As a result, a special provision was used to ensure the passage of the cuts. Unfortunately, a condition of using this unique provision (and the same one that was used to push dramatic healthcare reforms through earlier this year) was that the federal budget could only be altered for the next 10 years.

Well, the decade since the cuts were put in place flew by and the United States finds itself in a deficit scenario, a Democratic majority, and an economy that is recovering from one of the worst financial crises in history and could slip back into recession at any time.

Luckily for investors, pro-business sentiment has improved and is swaying Congress to consider extending many of these tax cuts. The current belief is that most of the Bush cuts will be extended, except for high-income individuals and families. High income means the 2% of households with incomes above $250,000 per year or individuals making more than $200,000 annually. However, nothing is set in stone and until an agreement is reached, the safest conclusion is to hope for the best but plan for the worst.

Here is a recap of the most important changes that will occur if Washington reaches gridlock and a full expiration of the tax cuts occurs. Starting at the lower end of income levels, the 10% tax bracket will revert back to 15%. The 25%, 28%, and 33% rates will all increase 3%, respectively, while the 35% rate would revert back to 39.6%.

From an investment standpoint, long-term capital gains taxes will go back to 20% from 15% for those in the middle and upper tax brackets. The taxes on dividends will go up dramatically, reverting back to regular income tax rates from the current 15%.

Estate taxes will return with a vengeance and will reach up to 55%. More generally, standard deductions will decrease for married couples, the child tax credit will fall by half to $500, and other exemptions for individuals with high incomes will no longer be allowed.

Statistics abound over what these changes will mean to taxpayers. If everything expires, middle class taxpayers are predicted to see an average rise in taxes of $1,500 each. The average tax rate for all income classes would raise to about 23.5% if everything expires, which would be up from 20.8% currently. If the President gets his way, however, this blended rate will rise only slightly, to about 21.4%.

Action to Take —> With that, there are a number of ways you can position your portfolio. For starters, consider shifting income-producing investments into retirement accounts and other buckets that may provide a shelter from taxes. For the biggest bang for your buck, consider high dividend-paying stocks, high-yield bonds, master limited partnerships (MLPs) or bonds picked up on the cheap during the height of the credit crisis.

Other strategies to consider consist of taking capital gains before the end of 2010 or even selling higher-yielding investments for those with total return potential focusing on price appreciation, so that capital gains can come from unrealized gains.

There are plenty of options for investors looking for appealing opportunities. For more individual strategies, here is an extremely useful report that can help you generate ideas. Specifically, it offers approaches that can allow you to avoid getting hit by any coming tax hikes and collecting above-average income at the same time.