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As it stands now, homeowners can deduct the premiums for their mortgage insurance as “residence insurance.” However, this may also go away.
State and local sales taxes
If you live in a state such as Alaska or Florida where there is no income tax, you’ve been able to deduct your state and local general sales taxes in place of taking the income tax deduction. Unfortunately, that won’t be the case next year unless Congress took action on it before December 31.
Donations through your IRA
If you are older than 70 ½ you’ve been able to make a charitable donation of up to $100,000 directly from your IRA disbursement without having to pay taxes on it. If this tax break expires, you’ll be required to take the disbursement first. This means it would be treated as taxable income.
Energy efficient improvements
This is your last opportunity to get up to a $500 credit on any improvements you’ve made to your home that were energy efficient – including windows and doors. However, if you have already claimed credits that totaled $500 in past years you won’t be able to claim them now. Do you think you might be eligible for these credits? Then go to EnergyStar.com or the company where you purchased the items to see if they qualify.
Costs of commuting
If you commute to your job by bus or train you’ve been able to get $245 a month or $2940 a year in tax-free money to help pay these expenses. But this may have expired on January 1. If so, you will be able to write off only $130 a month or a total of $1560 a year.
Mortgage debt forgiveness
If you’ve been a struggling homeowner you’ve been allowed to write off any debt forgiveness you got from a bank – when determining your taxable income. If you’re one of the more than six million homeowners who are still under water and owe more on your home than it’s worth, the expiration of this deduction is really bad news. If you get a mortgage modification from your bank or do a short sale in 2014 your tax bill could be thousands of dollars more than if you had completed the modification before the end of 2013. There are other changes in 2013 taxes that might affect you as explained in this video - again if Congress does not act before December 31 to extend the Bush tax cuts
Tips for cutting taxes
On a brighter note, there are some things you could do to cut your tax bill.
- One of the best is to increase your retirement savings. The IRS allows you to contribute up to $17,500 to your 401(k) or a similar retirement savings plan. When you contribute money to the plan, it is not treated as taxable income.
- Second, you could switch to a Roth 401(k). This won’t help you today but it can help with steeply rising taxes in the future. It's also a good thing to do if you just want to diversify your retirement savings. The difference between a Roth IRA and a regular 401(k) is that you don't get to deduct the money when it goes into a Roth. However, when you retire and begin withdrawing the money, it will be tax-free.
- Start an IRA. If you don't have a retirement plan at work or you just want to diversify your savings, you could put money into an IRA. The law allows you to contribute up to $5500 or $6500 if you are 50 years old or older by the end of the year. You might be able to deduct some or all of what you contribute to the IRA – depending on whether you participate in a retirement savings plan at work.
- Get a medical reimbursement account. In the event that your employer offers a medical reimbursement account, which is sometimes called a medical flex plan, you are allowed to contribute up to $2500 to it. This type of plan allows you to divert some portion of your salary to the account and then use the money to pay medical bills. What’s the benefit of this? It’s that you avoid paying both income and Social Security taxes on the money – and this can save you 20% to 35% or more vs. paying with after-tax dollars. Beginning this year you are permitted to contribute up to $2500 in a healthcare flex plan.
- Finally, you should pay your childcare costs with pretax dollars. After taxes, this can easily take $7500 or more of your salary to pay childcare expenses of $5000. However, if there is a childcare reimbursement account where you work you get to use pretax dollars. This can easily save you one-third or more of your costs since you wouldn't be paying either income or Social Security taxes. So if this plan is available in your workplace, be sure to take advantage of it.