With all of the political back and forth about the dreaded Fiscal Cliff, and with worries about the debt and the deficit front and center in our political conversations, there is reason to be concerned that a tax code overhaul might be a part of any ultimate deal. There are obviously a lot of moving parts, and quite a bit of political horse-trading going on, but one thing is certain amongst all of this uncertainty: Many of the tax breaks that families and individuals have come to rely on over the years might not be around much longer. While the exact size and scope of a compromise solution on tax reform is unknown, some important tax breaks are already under fire. Over the course of my next two posts, I’ll discuss some of the most important tax breaks and exemptions, and (in the event that they are changed or eliminated) suggest a few tips on how to take advantage of them while you can. Today I’ll review tax breaks impacting healthcare, mortgage interest, and retirement savings.
Healthcare-related tax breaks
Health-care benefits paid for by employers are the most significant tax break in the United States. Deductions for medical expenses and exemptions for Medicare payments are represent a sizable slice of the healthcare-related tax-break pie and losing them would put a new burden on workers and employers. For families the medical expense deduction threshold will increase to 10% of adjusted gross income in 2013, it might make sense for families and individuals who know they will have large expenses to “prepay” some of those expenses.
One of the most popular and well-known tax break out there, the mortgage interest deduction has been much-discussed in the media as a potential target for tax reform. There is a good chance that this is one tax break that will not survive in its current form, and it might make sense for those who can afford to do so to pay off a chunk of their mortgage principal before 2013 in order to reduce future interest payments.
While it seems less likely that tax breaks for pensions and retirement accounts will be drastically altered, some proposals have already been floated that would reduce the value of some deductions, particularly for higher-income individuals. To protect yourself against a possible change to the deduction rules in this area, it might may sense to max out your contributions thisyear.