Year-end planning will be more challenging than normal this year. Unless Congress acts, starting in 2013, individuals will see higher tax rates across the board and a number of popular deductions and credits will be gone. Estate and gift tax rates will be higher as well. Additionally, a number of popular deductions expired at the end of 2011 and won’t be available for 2012.

Deductions not available this year include, for example, the election to deduct state and local sales taxes instead of state and local income taxes and the above-the-line deductions for tuition and educator expenses. Deductions and credits that will disappear at the end of this year include generous bonus depreciation and expensing allowances for business property and the expanded tax credits for higher education and dependent care costs. Also, the phase-out rule that reduces write-offs for the most popular itemized deduction items (including home mortgage interest, state and local taxes, and charitable donations) for high income taxpayers is scheduled to come back in 2013.

Finally, as a result of the Healthcare Act, two new Medicare taxes will kick in starting in 2013. First, there will be a new 0.9% Medicare surtax tax on wages and self-employment earnings exceeding $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately). There will also be a new 3.8% Medicare contribution tax that will apply to the lesser of (1) net investment income, including interest income (but not if it is tax-exempt), capital gains, and dividends; or (2) modified Adjusted Gross Income (AGI) in excess of $200,000 ($250,000 for married filing jointly; $125,000 for married filing separately).

These tax increases are by no means a certainty. Congress could extend the Bush-era tax cuts for some or all taxpayers, revive some favorable tax rules that have expired, and extend those that are slated to expire at the end of this year. Which actions Congress will take remains to seen and may well depend on the outcome of the elections.

Despite uncertainties, what we can say for sure is that the 2012 federal income tax environment is still quite favorable, but we may not be able to say that for long. Therefore, tax planning actions taken between now and year-end may be more important than ever.