Americans are still adjusting to the effects of the payroll tax increase, but these proposed 2013 tax changes could pack an even bigger financial hit.
That's because Washington is desperate for additional revenue streams.
To solve the problem, U.S. President Barack Obama and others have suggested closing some loopholes and altering deductions in order to reduce the budget deficit and avoid some of the automatic spending cuts.
Unfortunately, you probably benefit from some of these tax breaks right now.
Here's a breakdown of five tax deductions and loopholes that could be in danger.
2013 Tax Changes: The Deductions and Loopholes Under Scrutiny
- Mortgage interest deduction: While it probably won't be completely erased, there are several ways this deduction could be changed. First, the deduction could be used only for primary homes and excluded from use for secondary residences. Second, the $1 million cap on the amount of mortgage debt that can be deducted could be reduced to $500,000. And Congress could also do away with the entire deduction for high-income earners.
Any change to this break could be a major blow to the housing recovery. The first-year deduction on a $350,000, 30-year mortgage with a fixed rate of 3.75% is $13,015, and the deduction is a major selling point for would-be homeowners.
- Employer health insurance tax: More than 150 million Americans get health insurance benefits from their employer tax-free, but that could change. For the first time, the overall cost of the employer-sponsored health plan will appear on the 2012 W-2 and will include how much employers pay for each employee's plan. Some observers say the tax form change could signal a new tax on the insurance benefits.
Taxing those benefits would eliminate the country's biggest tax break, as health insurance benefits taxed as regular income would raise $150 billion in revenue, according to the Joint Committee on Taxation. And taxing health benefits could force many individuals and families into plans with lower premiums and higher co-payments and deductibles.
- Charitable deductions: Suggestions include putting a cap on the overall amount of deductions allowed. Another idea would require taxpayers to donate a certain percentage of their income before being allowed to deduct charitable contributions. Critics argue this might cause people to postpone donations one year to make sure they reach the threshold the next year.
- Municipal bond interest: Wealthy investors like municipal bonds because their interest is exempt from federal and most state and local taxes. President Obama has proposed limiting the exemption at the 28% tax bracket, meaning an individual in the 35% tax bracket would pay a 7% tax on a previously tax-free investment. This might cause investors to demand higher rates for the bonds, driving up borrowing costs for cities and towns.
- Corporate tax breaks: Many feel large corporations do not pay enough taxes. That's why President Obama has suggested closing some corporate tax loopholes. Among the most debated is what to do with the $1.7 trillion in cash U.S. multinational companies have designated as foreign investments.
However, taxing this cash would negatively impact many U.S. companies and would hurt the U.S. economy. That's because it would prevent companies from investing in markets outside the U.S. that have more growth potential. Plus, most of the "foreign" cash that U.S. companies hold is in fact invested in U.S. government securities in U.S. banks. If the cash is taxed, companies might have to use the money for other purposes instead of investing in those securities.
>>Take a closer look at the 2013 tax changes that could affect you with this breakdown of the fiscal cliff deal tax adjustments Washington agreed to on Jan. 1.
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5 tax breaks on the chopping block