What You Should Know About Your Home and Your 2013 Taxes

These days few things start a fight on Capitol Hill faster than taxes. Despite the fact that three important tax benefits used by millions of American homeowners are days from expiring, Congress is unlikely to do anything to re-up them any time soon.

So if you’re eligible, tax year 2013 is possibly the last time to claim the private mortgage insurance (PMI) deduction, the energy tax credit, and debt forgiveness benefit, all of which all expire on Dec. 31, 2013.

At least there’s one piece of good news for homeowners: If you have a home office, there’s a new, simpler option for calculating the home office deduction for which you may qualify on your 2013 taxes.

Meanwhile, here’s what you need to know about those expiring benefits as you ready your taxes:

PMI Deduction

This tax rule lets you deduct the cost of private mortgage insurance, which is what you pay your lender each month if you put down less than 20% on a home. PMI protects the lender if you default on the home loan. Your deduction could amount to a couple hundred dollars depending on your tax bracket and other factors.
Find out if you qualify for and how to take the PMI deduction.

Energy-Efficiency Upgrades

This sweet little tax credit lets you offset what you owe the IRS dollar-for-dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades, from insulation to water heaters. On the downside, the credit is capped at $500 (less in some cases). But on the bright side, the right improvement could lower your utility bills indefinitely.

Related: Take back your energy bills with these high-ROI energy-efficiency practices.

Debt Forgiveness

When you go through a short sale, foreclosure, or deed-in-lieu, your lender typically lets you off the hook for some or all of what you owe on your mortgage.

That forgiven mortgage debt is income, on which you’d typically have to pay income tax.

Suppose you’re in financial distress and your lender agrees to let you short-sell your home, say for $50,000 less than you owe on the mortgage, and forgive you for the balance. Without the protection of the Mortgage Debt Forgiveness Act, you’ll owe income tax on that $50,000.

It’s likely if you had the money to pay income tax on $50,000, you’d have used it to pay your mortgage in the first place.

New Simplified Option for the Home Office Deduction

This may be the last year for the benefits above, but a new one kicks in for the 2013 tax year. If you work from home, you may qualify to use a new, simplified option for claiming the home office deduction when you file your 2013 taxes.

How much simpler is it? It lets you claim $5 per sq. ft. for up to 300 sq. ft. instead of having to compute the actual expenses of your home office using a 43-line form. To calculate the square footage of your office, just multiply the length of two walls. For example, an 8-by-10-foot room is 80 sq. ft. And at $5 per, that’s $400.

Although using the simplified option is obviously easier, the basic requirements for claiming the home office deduction haven’t changed. Your home office still must be used for business purposes:

• Exclusively, and

• On a regular basis.

Related: Which Home Office Set-Ups Qualify for a Deduction?

Why Might the Tax Benefits Not Be Renewed?

Although the expiring tax benefits were renewed retroactively in past years, that may not happen in 2014 because many in Congress would like to see comprehensive tax reform rather than scattershot renewals of individual provisions. This could delay a decision on the homeownership tax benefits until the big picture budget and tax issues are resolved.

Source:HouseLogic -What You Should Know About Your Home and Your 2013 Taxes by Dona DeZube  Read more: http://www.houselogic.com/blog/tax-deductions/tax-deductions-credits-for-homeowners-2013/#ixzz2nfx5Wfgn

IRA and Retirement Plan Limits for 2014

The maximum amount you can contribute to a traditional IRA or Roth IRA in 2014 remains unchanged at $5,500 (or 100% of your earned income, if less). The maximum catch-up contribution for those age 50 or older in 2014 is $1,000, also unchanged from 2013. (You can contribute to both a traditional and Roth IRA in 2014, but your total contributions can't exceed this annual limit.)

Traditional IRA deduction limits for 2014

The income limits for determining the deductibility of traditional IRA contributions have increased for 2014 (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income ("modified adjusted gross income," or MAGI) is $60,000 or less (up from $59,000 in 2013). If you're married and filing a joint return, you can fully deduct your IRA contribution if your MAGI is $96,000 or less (up from $95,000 in 2013). If you're not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $181,000 or less (up from $178,000 in 2013).

If your 2014 federal income tax filing status is:	Your IRA deduction is reduced if your MAGI is between:	Your deduction is eliminated if your MAGI is:
Single or head of household	$60,000 and $70,000	$70,000 or more
Married filing jointly or qualifying widow(er)*	$96,000 and $116,000 (combined)	$116,000 or more (combined)
Married filing separately	$0 and $10,000	$10,000 or more

*If you're not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $181,000 to $191,000, and eliminated if your MAGI exceeds $191,000.

Roth IRA contribution limits for 2014

The income limits for Roth IRA contributions have also increased. If your filing status is single/head of household, you can contribute the full $5,500 to a Roth IRA in 2014 if your MAGI is $114,000 or less (up from $112,000 in 2013). And if you're married and filing a joint return, you can make a full contribution if your MAGI is $181,000 or less (up from $178,000 in 2013). (Again, contributions can't exceed 100% of your earned income.)

If your 2014 federal income tax filing status is:	Your Roth IRA contribution is reduced if your MAGI is between:	You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household	$114,000 and $129,000	$129,000 or more
Married filing jointly or qualifying widow(er)	$181,000 and $191,000 (combined)	$191,000 or more (combined)
Married filing separately	$0 and $10,000	$10,000 or more

Employer retirement plans

The maximum amount you can contribute (your "elective deferrals") to a 401(k) plan in 2014 remains unchanged at $17,500. The limit also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Savings Plan. If you're age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2014 (unchanged from 2013). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can't exceed the annual limit ($17,500 in 2014 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan--a total of $35,000 in 2014 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan in 2014 is $12,000, unchanged from 2013. The catch-up limit for those age 50 or older also remains unchanged at $2,500.

Plan type:	Annual dollar limit:	Catch-up limit:
401(k), 403(b), governmental 457(b), SAR-SEP, Federal Thrift Savings Plan	$17,500	$5,500
SIMPLE plans	$12,000	$2,500

Note: Contributions can't exceed 100% of your income.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2014 is $52,000 (up from $51,000 in 2013), plus age-50 catch-up contributions. (This includes both your contributions and your employer's contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2014 has increased to $260,000, up from $255,000 in 2013; and the dollar threshold for determining highly compensated employees remains unchanged at $115,000.

Source: Sean Henderson, Financial Advisor - Waddell & Reed 210-826-0685 ext: 140

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013.

More Smart Year-End Tax Moves for 2012

Everyone needs help with tax strategies. Earlier in the week I posted a few ideas. Now I am continuing with some additional tips. If you haven't read the earlier post, I hope you will go back and read it for more ideas.

Review Your Portfolio Allowing taxes to dictate your investment strategy is rarely a good idea. But if you’re already considering selling appreciated securities or other assets -- even if you don’t have losses to offset them -- cutting them loose by year-end could save you money (you can harvest losses to offset investment gains, plus shield up to $3,000 of ordinary income from taxes).

Unless Congress extends the Bush tax cuts, the top rate on capital gains will rise to 20%, and the top rate for dividends will jump to 39.6%. Even if Congress extends current rates, the new 3.8% surtax on unearned income, levied on singles with adjusted gross income over $200,000 (over $250,000 for married couples), will boost the top rate for long-term capital gains and dividends to 18.8%.

If you think you’re going to need to sell some of your investments to raise cash next year, do it before December 31. And if you're an investor in the two lowest income tax brackets, 2012 is the last year you will pay zero tax on capital gains and dividends.

To take advantage of the 0% capital-gains rate for 2012, your taxable income can't exceed $35,350 if you are single; $47,350 if you are a single head of household with dependents; or $70,700 if you are married filing jointly.

Convert Your IRA to a Roth If you think your tax rate is going to rise sometime in the future, converting to a Roth makes a lot of sense. Withdrawals from traditional IRAs are taxed at your ordinary income tax rate, while all withdrawals from Roths are tax-free and penalty-free as long as you're at least 59½ and the converted account has been open at least five years. You do have to pay taxes on any pretax contributions and earnings in your traditional IRA for the year you convert. That's why converting before New Year's Eve is smart: You'll pay taxes at current tax rates, which are unlikely to go any lower.

If you're an upper-income taxpayer -- with modified adjusted gross income of at least $200,000 if you're single or $250,000 if you're married filing jointly -- you have an even greater incentive to convert in 2012 because converting next year could trigger a new 3.8% surtax on unearned income. (The surtax was enacted to pay for some of the costs of the health-care reform law.) Withdrawals from an IRA aren't subject to the surtax, but they're counted as adjusted gross income and could lift your AGI above the threshold.

There is a major caveat, though. We think a major tax reform package could be enacted as early as next year that would lower overall tax rates, while eliminating tax credits and deductions. If that happens, you'd be better off converting after December 31.
Fortunately, when you convert to a Roth, you can change your mind. If it looks like tax reform is going to lower your tax rate, you have until October 15, 2013, to undo the conversion and turn your Roth back into a regular IRA. 

Give to Charity This is a great time of year to clean out your closets and garage, but you can write off donations to a charitable organization only if you itemize deductions. A few bags full of gently used clothes and household items can add up to hundreds of dollars in tax deductions, but valuing those donations can be difficult. (Try Turbo Tax's free tool).

If you donate a used car worth more than $500 to charity, your deduction will be limited to the amount the organization receives when it sells it. But you may be able to claim a bigger deduction based on the vehicle's fair-market value if the charity uses it to deliver meals, for example, or gives it to a needy individual. The charity will list the vehicle's sale price, or whether an exception allowing a higher deduction applies, on Form 1098-C, which you must attach to your tax return. Because of previous abuses, donations of used cars and other noncash items may attract extra scrutiny from the IRS. So keep scrupulous records.

Send cash donations to your favorite charity by December 31 and hang on to your canceled check or credit card receipt as proof of your donation. If you contribute $250 or more, you'll also need an acknowledgment from the charity.

Spend Down your Flex Plan (If You Need to) If you're thinking of cleaning out your 2012 flexible spending account to avoid the "use it or lose it" rule, remember that you can no longer use flex funds to pay for over-the-counter medicines, such as aspirin, ibuprofen or allergy meds, without a prescription (except for insulin).

But that restriction does not apply to other nonprescription medical items, such as crutches, contact-lens solution or bandages. (For a list of what is allowed by law, see IRS Publication 502.) The same rules on eligible purchases apply to health savings accounts.

In most cases, you have until March 15, 2013, to use your 2012 funds, but some employers still adhere to the December 31 deadline for using the money or forfeiting the balance. Check with your employer to verify your plan's deadline. 

Source: Kiplinger Magazine

 

Smart Year-End Tax Moves for 2012

Year-end tax planning is stressful under ordinary circumstances, and this year is anything but ordinary. Unless Congress reaches an agreement by December 31, tax rates on wages and investments will rise, the exemption from the estate tax will shrink, and dozens of tax breaks will disappear. Without a compromise, nearly 90% of Americans will pay higher taxes next year, and the average household’s tax bill will increase by $3,500, according to an analysis by the Tax Policy Center.

The most likely fix is a temporary extension of the current tax rates, but the odds that a lame-duck Congress will reach a deal are fading. With that in mind, focus on these year-end tactics that will trim your tax bill no matter what Congress does.

1. Pay into your 401(k) or similar employer-based retirement plan. Money you contribute to your plan (if it's not a Roth) is excluded from your income, lowering your tax bill.  If you're not yet on track to max out your contributions by year-end, you can direct some extra dollars to your retirement plan during your last few pay periods -- or, if you get a year-end bonus, use it to fatten your savings.

This year, workers can contribute up to $17,000 to employer-based plans. Workers 50 and older can contribute up to $22,500.

2. Cut your tax refund The majority of Americans are addicted to refunds. More than 75% of U.S. taxpayers give Uncle Sam an interest-free loan year after year, with an average refund of about $3,000 -- that's $250 per month. Wouldn't you rather get your money when you earn it instead of waiting a year for a refund? What’s more, that fat refund represents a security risk -- identity thieves have been filing fraudulent returns and stealing the refund.

There's an easy fix. Just file a revised Form W-4 with your employer. The more "allowances" you claim on the W-4, the less tax will be withheld. If your current financial situation is similar to last year's, just use our Tax Withholding Calculator. Answer three simple questions (you'll find the answers on your 2011 tax return), and we'll estimate how many additional allowances you deserve -- and how much your take-home pay could rise.

3. Boost Your 2012 Income Deferring discretionary income, such as year-end bonuses, is a popular tax strategy when tax rates are expected to remain the same or decline. This year, though, high-income taxpayers may want to accelerate discretionary income to avoid a tax hike created by the health-care reform law. Starting in 2013, taxpayers will pay an additional 0.9% Medicare tax on income from wages over $200,000 ($250,000 for married couples.) Of course, if tax reform leads to lower rates, deferring income would still make sense. But that may not happen right away: rate cuts in the Tax Reform Act of 1986 didn’t take effect until 1987 and 1988. 

4. Plan Your Itemized Deductions If tax rates increase next year, deductions will be more valuable. That would seem to argue in favor of postponing your charitable gifts until 2013. Much depends, though, on your personal situation. If you expect your income to drop next year -- you plan to retire, for example -- the deductions will probably be more valuable this year, no matter what happens with tax rates.

And for high earners, there’s another twist. Before 2001, the tax code limited itemized deductions and personal exemptions for taxpayers whose income exceeded a certain threshold. The Bush tax cuts phased out those limits and repealed them in 2010. The reductions are scheduled to be reinstated in 2013. If Congress doesn’t act, high-income taxpayers could lose up to 80% of their itemized deductions. For that reason, a charitable gift made in 2012 may produce greater tax savings than one made in future years, even if tax rates increase.

You may want to pay other deductible expenses before year-end, such as your January mortgage, 2013 real estate taxes and fourth-quarter estimated state income taxes. Be careful, though: If you're a candidate for the Alternative Minimum Tax, some of those deductions could be disallowed.

To take advantage of the 0% capital-gains rate for 2012, your taxable income can't exceed $35,350 if you are single; $47,350 if you are a single head of household with dependents; or $70,700 if you are married filing jointly.

Source: Kiplinger Magazine