There are a significant number of people whose itemizable deductions far exceed the standard deduction. There are also many who have almost no itemized deductions and should clearly claim the standard deduction. There are some, however, whose standard and itemized deductions come very close to being the same amount each year. For these taxpayers there is an opportunity to plan out their deductions in a way that can save them money on their tax bill by delaying their deductions in one year and accelerating them in the next.
In order to illustrate how this planning strategy works, I will use the example of a married couple in their 40′s who own a home. Each year they pay $1,500 in property taxes, $6,000 in mortgage interest and give $4,500 to their favorite charities. This adds up to $12,000 in itemized deductions. Their standard deduction would be $11,400. In this scenario it is better for them to itemize, but it would only give them $600 more in deductions than by claiming the standard deduction.
What this couple could do instead is strategicly plan their itemized expenses each year in order to maximize their deductions. They could delay writing a check for this year’s charitable giving until January 1st of the next year. Then, in the next year they could be sure to make the donations for that year before December 31st. Finally, at the end of December in the second year they could make their mortgage payment for January a little early.
By delaying the charitable giving in the first year their itemized deductions would be $7,500 – far below the $11,400 available in the standard deduction, so they would claim the standard deduction. In the second year they would have two years worth of charitable deductions and an extra mortgage payment. This would give them a total of $17,000 in itemized deductions in the second year.
If the couple did not plan, they would have $12,000 of itemezed deductions each year, or $24,000 over a two year period. With the planning in place they would claim a standard deduction of $11,400 the first year and an itemized deduction of $17,000 the second year, for a total of $28,400 in deductions over the same two year period. While their total expenses did not change at all, proper planning allowed them to take an additional $4,400 in deductions! If they were in a 25% marginal tax bracket this would have saved them $1,100 in taxes.
There are a couple potential pitfalls in this strategy, however. First, you must be sure to monitor your income and the changing tax laws. If the tax rates or your income are going to change significantly in a coming year, you must be sure to take those changes into account when implementing this strategy. Second, if you are subject to the Alternative Minimum Tax there are several itemized deductions that will not help you if you accelerate their payments because they are removed in the calculation of the AMT.