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  • Taxmageddon 2013: How to Prepare for Looming Tax Law Changes

    It's often said the only things certain in life are death and taxes – but this year, even taxes aren't a certainty.

    At least not the specifics, thanks to Election 2012 and Taxmageddon 2013. Investors are left with more questions than answers.

    Will the so-called Bush tax cuts expire as scheduled – or be extended? Will levies designed to help implement and pay for Obamacare go into effect – or will Republicans finally succeed in repealing the new healthcare program?

    Will President Barack Obama view his re-election as a mandate to impose more new taxes to expand social programs, or will a newly-elected President Mitt Romney cut taxes in a bid to encourage renewed economic growth?

    That's why it's important for investors to look at the range of possibilities relative to their current financial holdings and take precautionary actions where appropriate.

    This special Money Morning series will examine a number of upcoming or proposed changes in tax laws and rates and suggest strategies to minimize their impact on your investments. Or better yet, take advantage of them if possible.

    With Taxmageddon, Rates are Set to Rise

    As it stands, there are more than two dozen tax-law changes scheduled to take effect in 2013. Some of them target nearly every single taxpayer while others are more narrowly focused on individuals, such as small business stockholders and home sellers.

    Of most immediate concern to investors is the scheduled increase in tax rates on capital gains. Currently, the federal government recognizes three types of capital gains:

    • Short-term gains – Profits from assets held for less than one full year. These gains are taxed as ordinary income at a rate based on your total personal income, with percentages now ranging from 10% to 35%.
    • Ordinary long-term gains – Profits from assets held for more than one year, now taxed at a maximum rate of 15%, regardless of income from other sources. (Note: Individual taxpayers in the 10% and 15% brackets now pay no tax on long-term capital gains but merely include them with other taxable income. However, in 2013 these taxpayers will be subject to a 10% tax on long-term gains.)
    • Qualified long-term gains – Profits from assets purchased after the 2000 tax year and held for a minimum of five years. Qualified gains are currently taxed at a maximum 15% rate.

    This relatively simple structure will become more complicated in 2013, for several reasons…

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