Even though April 15th is still several months away, it’s never too early to start working on your tax planning strategy. The new year is set to bring a number of changes, including new tax rules under the Affordable Care Act and the expiration of several tax benefits. Unless Congress decides to extend some or all of the expiring provisions, you’ll only have one more chance to take advantage of these key tax breaks.
1. Deduction for Mortgage Insurance Premiums
Owning a home can bring big benefits at tax time if you’re eligible to claim deductions for things like mortgage interest and private mortgage insurance. Private mortgage insurance or PMI is typically required for homeowners who put less than 20 percent down on their home. You could deduct your PMI premiums for 2012 and 2013 but the deduction expires at the end of the year. You can still claim the mortgage interest deduction but only if you itemize.
2. Tax Credits for Energy Efficient Home Improvements
If you’re planning on making some eco-friendly home improvements, you’ll have to do it before year’s end to take advantage of the energy efficiency tax credit. The credit is good for up to $500 towards the installation of certain products, including energy efficient windows and doors, biomass stoves, insulation and roofing. If you’re planning on tackling a large-scale project, like installing solar panels, a geothermal heat pump or a wind turbine you’ll still be eligible for a tax credit through 2016.
3. Electric Vehicles
In an effort to encourage consumers to go green on the highway, the federal government offers tax credits for the purchase of certain 2 or 3-wheeled electric vehicles, including motorcycles and scooters. If you’ve been thinking about making the switch to electric, you’ll have to buy before year’s end to get the credit. There’s still a separate credit of $7,500 available for certain 4-wheeled electric cars, including the Chevy Volt and the Nissan Leaf, but the credit is set to be phased out once a set number of vehicles have been sold.
4. Deduction for Certain Educator Expenses
Currently, qualified educators can deduct up to $250 worth of unreimbursed classroom expenses but 2013 is the last year this tax break will be available. This is an above-the-line deduction, which means you can claim it regardless of whether you itemize or claim the standard deduction and it’s not based on income. If you’re a teacher, it might be time to stock up on school supplies before the deduction disappears.
5. Commuter Tax Break
For 2013, employees could spend up to $245 pretax each month on public transportation, including rail and bus passes. This amount is the same as the $245 pretax that employees can spend on parking. For 2014, the tax parity for public transit would drop to $130 per month. If you’re a commuter, you’ll want to make sure you’re taking advantage of the parity through your employer. That way if Congress decides to extend it later on, you’ll be able to get back some of the money you paid towards public transit costs.
6. Charitable Contributions from an IRA
If you have a traditional IRA, you’re required to start taking minimum distributions when you turn age 70 1/2. This means that you have to start paying income tax on the money that you’re taking out. If you transferred money out of your IRA directly to a charity, you could avoid paying the tax and get a deduction for your charitable gift. The qualified charitable distribution provisions are set to expire at the end of the year so you’ll need to act fast to get these tax benefits.
7. Deduction for State and Local Sales Tax
Generally, if you pay state or local income tax you can deduct if from your federal taxes if you itemize. If, however, you live in a state that doesn’t have income tax you can still claim a deduction for sales tax. If you buy something big, like a car or boat, claiming the deduction can really pay off. The likelihood of the deduction being extended beyond 2013 is high but if you’re considering a major purchase you might want to make your move sooner rather than later.
8. Exclusion of Cancellation of Indebtedness for a Principle Residence
Generally, when a debt is forgiven the IRS considers it to be taxable income. When a debt is cancelled due to the foreclosure or short sale of your principle residence, you can exclude up to $2 million of the forgiven amount from your taxable income. This key provision of the Mortgage Forgiveness Debt Relief Act is set to end this year, which could spell trouble for struggling homeowners.