As the new year approaches, taxes will again be front and center in shaping strategy for both actions before year-end and 2013 financial planning.  This year is no exception, and in fact the prevalence of tax as a driver will be magnified given several major tax changes that are set to take place at year-end absent action by Congress.  Merrill Lynch did a nice job of concisely summarizing the major tax changes here (“Tax law changes call for careful planning in 2012”).  Also see our earlier post on this topic here.  At a high-level, these changes include:

  • A vast expansion in the reach of the Alternative Minimum Tax (AMT)
  • Personal income tax rates to rise to a maximum federal rate of 39.6% (from a 35% top rate)
  • Loss of Bush-era reduced tax rates on long-term capital gains (set to rise to 20% from 15% and to 10% from 0%) and qualified dividends (from 15% to the individual’s ordinary income tax rate – as high as 39.6%)
  • Introduction of a 3.8% Medicare surtax on unearned income for high-income filers
  • Section 179 deduction for business depreciation to be significantly reduced in 2013
  • American Opportunity Tax Credit for certain college expenses expires at end of 2012
  • 2% increase in FICA payroll taxes (current reduction to expire at end of 2012)
  • Education IRA limit reduced to $500 in 2013 (from $2,000)
  • Highest estate tax rate rises to 55% (from 35%); estate tax exemption drops to $1M (from $5M)

Read more here and here.