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Will You Lose Your Home Mortgage Deduction In 2013?

Last Friday, I spent a chunk of my day at the Georgia Regional Financial Planning Association conference. I was a panelist at the event, but one of the reasons I attended was to see a friend of mine Michael Kitces speak on all of the tax law changes here in 2013. He is one of the best tax management advisors that I know of in the industry. As I have shared before in my blogs, tax management will be as important if not more important than asset management over the next decade. With all of the recent fiscal cliff changes, the tax law has become even more complicated and requires a close eye here in 2013 when income to tracking your gross income, capital gain sales, and potentially triggering out things like stock options or selling a piece of rental real estate. One of the main questions taxpayers will face this this year is whether or not their home mortgage deduction will be phased out.

For those of us fortunate enough to be able to itemize our deductions (or Schedule A) on our tax returns, the first question is what kind of deductions can go on this deductible schedule? Itemized deductions can constitute things like our home mortgage interest, charitable contributions, real estate taxes, state income taxes, personal property tax, medical expenses (generally above 10% of adjusted gross income this year unless you turn 65 between 2013-2016), and unreimbursed employees expenses (above 2% of our adjusted gross income). If you are unsure whether or not you should itemize, you should seek the counsel of a qualified accountant or CPA.

Leave it us to the Government to make things even more confusing in 2013 as to how you will be taxed. We now have seven tax brackets in 2013 including 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Itemized deductions were being phased out from 2006 to 2009 and got completely phased out in 2010. None of us have felt the effect of having our itemized deductions phased out in the past few years because you essentially got a free pass. Prior to 2006, there was a phase out of 3% of itemized deductions for every $1 above a certain adjusted gross income threshold. In 2013, the rules changed again where single individuals who make more than $250,000 adjusted gross income and married couples that make more than $300,000 will again be subject to a 3% phase out of their itemized deductions for every $1 that they make above those income levels.

So what does this all mean to the taxpayer who is now considered to be wealthy? In Kitces’ speech (check out his blog as well www.nerdseyeview.com), he reminded the crowd that when all of the IRS shenanigans are said and done, this phase out of itemized deductions really represents a roughly 1% to 1.2% tax increase on those taxpayers subject to the phase out. This 1% tax increase is in addition to the .9% Medicare Tax increase that most of the same taxpayers will see this year as well. So, rather than the IRS merely creeping up the brackets from 33% to 34% or 39.6% to 40.6%, they instead took away these deductions which will confuse the average taxpayer as to how much tax they are really paying every year.

Those of you who are under those income levels will fortunately still get to keep your entire home mortgage deductions while individuals and married couples above the $250,000 and $300,000 mark respectively will start to lose a piece of your deduction. This means that not only is tax management planning going to be important for overall decision making before the end of 2013, but also a larger financial planning question about whether or not to accelerate paying off your mortgage early as well. It figures that just when things should be getting simpler, the Government has made then even trickier than before. The smart money move for those of you expected to be above the $250,000 to $300,000 is to do a little summer school tax planning before the end of the year comes or it just might be the IRS taking a bite out of your home mortgage deduction!

Written by:

Ted Jenkin

CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Editor in Chief of Your Smart Money Moves

Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services

Ted Jenkin  is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.

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About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

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