It’s probably too late to save on taxes for 2013. But now is a good time to plan optimize your tax breaks in 2014. Every American should know about the big four tax breaks available. By using theses breaks, taxable income can be reduced significantly.
With proper structuring of one’s annual income, an individual’s tax liability can be reduced. For example a person with an annual income of $800,000 may have $300,000 in deductions, meaning that taxes are only owed on the remaining $500,000.
No one really knows how much tax deductions cost the federal government. In recent years, the federal government has been spending about $1 trillion more that it has been taking in. If tax deductions were eliminated (and if government spending were capped), the $1 trillion deficit would be much lower. (Note: for 2013, the government, because of an improving economy, may have a deficit lower than $1 trillion.)
The four big tax breaks in 2014
The four big tax breaks in 2014 are: home-mortgage interest; local taxes (like property taxes); health benefits; and charitable contributions.
1. The home-mortgage interest deduction is, in effect, telling a taxpayer to own a home or face a much larger tax bill. Home-mortgage interest is “front-loaded,” meaning that in the early years of a mortgage, most monthly payments are for interest, not principal. And it’s the interest that is tax deductible.
2. Property taxes may be annoying, but because there is a federal tax deduction for them, the pain is lessened.
3. Health benefits are part of an individual’s compensation, especially when a worker receives such benefits from his boss. For example, if the boss provides the worker with $10,000 in health benefits, the worker pays no tax on the $10,000. And the boss can claim health benefits as a tax-deductible business expense.
4. Charitable contributions should be made for purely selfless reasons, not because donations to a charity reduce a person’s tax bill.
Tax breaks in 2014 may seem to be an American right. But deductions distort an economy’s performance. A home-mortgage interest deduction may be nice for an individual, but maybe a deduction for growing more food or finding new sources of energy may benefit the economy more.
Better yet, why not eliminate all deductions rather than have Uncle Sam decide what is good for the economy and what is not.
Tax deductions are, in effect, subsidies. Yes, it’s nice to receive some money to install solar panels on a rooftop, but perhaps investing in oil exploration may be better. The crucial point is this: let’s have the individual, not the government, decide where money should go.
What’s the chance of changing American tax law? The odds of a substantive change are close to zero.
People might want to remember the famous quotation attributed German chancellor, Otto von Bismarck, who allegedly said: “Laws are like sausages, it’s better not to see them being made.”