Bad News About Taxes

While it’s almost impossible to find good news about taxes these days, 2014 will be an especially bad one. For one thing, the federal government shutdown that happened in October meant that the IRS was late in updating its systems. One result of this is that if you’re set to file your federal tax return early in January, you may have to wait a bit longer to get your check.

Not until January 31

The IRS has said that it won’t start processing 2013 returns until January 31, which is 10 days later than was originally scheduled. It cited the 16-day limited government shutdown in October of last year as the reason for this delay. It closed down most IRS operations and disrupted the process of updating its systems for the 2014 tax season.

This isn’t the first time

This is not the first time that the IRS has been late in getting out checks. It was delayed in 2013 until January 31 due to the “fiscal cliff deal” that Congress was unable to finalize until New Year’s Day.

If you don’t file until the last minute

How will this affect you if you’re one of the millions of Americans who wait until the very last minute to file your return? The answer is, “nothing.” The last date to file returns is still April 15. Of course, if you find you’d have a hard time meeting that deadline, you could file for an automatic 6-month extension – although you’d still have to pay any taxes you owed on or before April 15 to avoid paying interest and penalties.

More bad news

Unfortunately, this delay in getting out checks isn’t the only bad news about taxes as there are many tax beaks that are on the verge of disappearing – assuming that Congress did not extend them before December 31. Here are the eight that will be most missed.

NOTE: This article was written before december 31 so it’s possible that some or all of these deductions may have been extended. Be sure to watch the news to see if this is what happened.

Tuition and fees

There is now a deduction for tuition and fees of up to $4000 for parents and students paying for college. To take advantage of this tax break before it goes away you should have paid your spring tuition and fees before Dec. 31. If you do this you can still claim those expenses on your 2013 tax return.

Teachers’ expenses

If you teach in a school system that doesn’t reimburse you for classroom supplies you bought yourself such as pencils, pens, notebooks and paper you should have been able to take advantage of the Educator Expense Deduction to help cover these costs. Since this may go away next year, it would be good if you have purchased everything you need before the end of the year to get this credit.

Premiums for mortgage insurance

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.