Doubling Up on Deductions for 2016

Most people take the standard deduction, largely because they don't have enough in itemized deductions in any given year to make it worth itemizing. But by doubling up on your deductions in a single tax year, you might be able to squeeze more in deductions than you otherwise would.

In this clip from Industry Focus: Financials, Motley Fool analyst Gaby Lapera talks with Dan Caplinger, the Fool's director of investment planning, about how paying two years' worth of deductible expenses can let you itemize in one year while still taking the standard deduction in the other, leading to greater tax savings. By doing things like paying property tax bills early, giving two years of charitable gifts in a single year, or making large estimated tax payments for state income tax bills, you can effectively shift deductible expenses from one year to the next and save more in the long run.

A full transcript follows the video.

This podcast was recorded on Nov. 28, 2016.

Gaby Lapera: There are all sorts of other itemized deductions that you can double-up on -- so, you can pay two years' worth of the expenses at year-end to max out the deduction for this year. Do you have any comments on what sort of deductions those would be?

Caplinger: One thing you can do is double up on your charitable deductions, since we were just talking about charitable deduction. If you have the cash to do it, and if you're in the habit of making a particularly sized gift every year, you can, instead of making one gift now and waiting until January, or even worse, this time next year to do it, if you go ahead and give your two years worth of gifts now, you can basically double up the deduction. Now, it's true that next year you won't get a deduction for that, because you double it up. But here's the thing: A lot of people are really close to that line between whether they should itemize their deductions or just go ahead and take the standard deduction. A lot of the time, doubling up can really make the difference between it being smart to do the itemized deductions, or to take the standard deductions. Over the course of time, some people find -- and check the math to see if it's right for your situation -- that if you double up on those deductions, it lets you get more in total deductions over the long run than you would get if you just said, "I have one year's worth of deductions, we'll just claim them year-in and year-out one by one."

Lapera: I have a question. If you double up on your charitable donations for 2016, does that mean you can't take the same deduction in 2017? Or does it just mean that you would have less, that potentially you would just be giving less in 2017?

Caplinger: It has to do with what you do with the money. Just to throw an example out there, say you give some organization $100 every year. You can keep doing that, and then you'll be able to deduct $100 every year. If you double up and say, "I'm going to give my $100 for 2016 and my $100 for 2017, I'm just going to go ahead and get that out of the way now, I'm going to write a check for $200," then you get to deduct the $200 this year, you don't get to deduct anything for next year because you don't pay it next year, you're paying it this year. If you go ahead and make another -- if you decide to be incredibly generous and say, "I know I said I already made my gift, but I'm going to go ahead and give another gift later in 2017," then that's fine, you've actually given more money, so you can take that deduction again. But there are a lot of situations where, you can think about it in terms of pre-paying what you wouldn't necessarily have to pay until later. Another example that comes in with a lot of people is property taxes. A lot of places will charge you half of your annual property tax every six months. You always have the option of paying it all upfront in the earlier year. If you do that, you get to deduct it all up in the earlier year. If you don't, then you just claim half this year and half next year. Again, depending on the situation you have with your standard deduction, with other types of itemized deductions, sometimes it makes more sense to do it one way, sometimes it makes more sense to do with the other way, and sometimes it doesn't make any difference. But it's something to think about, especially this year, because a lot of people are thinking in terms of, "I want to maximize deductions for 2016 in the hopes that a new administration might be bringing us lower tax rates next year, so those tax deductions might be worth more in 2016 than they will in 2017 and in the future."