Five Tax Breaks to Remember This Year

NOTE: This article was written in 2013 and is here just because it’s a part of my portfolio of past work. The information in it is out of date - consult your tax professional for current tax breaks available to you.

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The deadline for filing your 2013 taxes is fast approaching.  In the rush to file it is sometimes easy to forget an important tax break that can save you money.  Here are five of the big ones:  

Child Credit

One of the nice things about the infamous “fiscal cliff” tax bill from last year is that the $1,000 child credit is now permanently on the books.  If you have children who were under the age of 16 at the end of last year, you may qualify for up to $1,000 per child in direct tax reduction.  The credit is available for children by birth or adoption, as well as those placed in your foster care by court or an appropriate agency.

There are income limits, of course: the full credit is available to married couples making under $110,000 and filing jointly; $55,000 and filing separately; or $75,000 if you are a married head of household, single, or widowed.  For those whose income is higher than these limits there is a worksheet in the instructions booklet for Form 1040 that can help you determine your exact amount.

American Opportunity Tax Credit

This popular credit helps those working toward a college degree to defray the cost of the tuition and books.  To claim the full $2,500 credit, the maximum income for singles and married people filing separately is $80,000; for married couples filing jointly it is $160,000.

Those making more may still get a smaller credit: your tax software can help you calculate the amount.  Note, however, that you cannot both claim this credit and use a deduction for the college costs.  The IRS recommends that you calculate both the net amount of the credit and the deduction you could qualify for, and than use the one that gives you a bigger benefit.

State Sales Tax

If you itemize, the IRS gives you a choice to either deduct the state income tax or the sales tax.  It is your choice: calculate both deductions and use the bigger one.  For most people the state income tax is the larger of the two, but if you made any large purchases last year you may find out that the sales tax deduction will benefit you more.

Mortgage Insurance

In Box 4 on Form 1098 that you received from your lender you will see the amount of the mortgage insurance that you paid last year.  If your mortgage was issued after 2006, you get to deduct the full amount.  If you bought your home last year, don’t forget about the prepaid mortgage insurance listed on your closing statement.  For this portion of your mortgage insurance the IRS says this: “You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained.”  Google “Publication 936” for more details.

Mortgage Interest, Points and Taxes

You already know that the mortgage interest and property taxes are tax deductible.  But did you know that the same is the case for the interest and taxes on a second home or vacation property?  The home must meet certain IRS rules, but it’s worth checking with your tax advisor.

Purchased a home last year?  First, remember to deduct the prepaid interest and taxes that are listed on your closing statement.  And second, you can deduct the points you paid on that loan, even if the seller paid them.  Refinanced your home?  Those points are still deductible, but not all at once - you have to amortize them over the life of the loan.

The Small Print

I am not a tax professional, so this article does not constitute tax advice.  Consult your CPA or tax advisor for full details regarding your particular tax situation.