At tax time, you always want to pay as little in taxes as you can. Taking advantage of the best tax breaks available is vital in order to achieve that goal, and for most taxpayers, either the standard deduction or their itemized deductions will represent the biggest tax deduction they take on their returns. Yet many taxpayers don't take full advantage of their right to choose either to itemize or to take the standard deduction. By using a simple strategy that involves doubling up on some itemized deductions, you might be able to squeeze more out of the biggest tax deduction available to you.
Don't let your deductions go to waste
Every year, taxpayers have a choice. They can keep track of all the expenses they can deduct, such as mortgage interest, state and local taxes, and charitable contributions, and then itemize their deductions on IRS Form 1040's Schedule A. Alternatively, they can do no extra work and simply take the standard deduction. For many taxpayers, the standard deduction is higher than what you'd be able to itemize anyway, and so there might not seem to be much reason to do anything else.
However, if you're like many taxpayers, the amount you'd be able to claim in itemized deductions is relatively close to the standard deduction. From one angle, that means that the standard deduction isn't really doing you much good, because even if it didn't exist, you'd get a similar amount by itemizing. For those who have similar deductible expenses year in and year out, this is a recurring issue that limits tax savings.
Making better use of the standard deduction
Through smart tax planning, you can use the choice between standard and itemized deductions to your advantage. The key is that you get to deduct most expenses in the year in which you pay them, even if they're for bills that might not be due until a future year. By "doubling up" and paying two years' worth of expenses in a single tax year, you can take better advantage of standard and itemized deductions.
An example will make this easier to understand. For 2016, the standard deduction for married joint filers is $12,600, rising to $12,700 in 2017. Say that a couple has deductible expenses of $12,500, split between $2,500 in mortgage interest, $5,000 in real estate taxes, and $5,000 in charitable contributions.
If the couple simply pays everything in the year in which it's due, then itemized deductions would add up to $12,500. That's less than the standard deduction, so the couple will always take the standard deduction.
However, consider if the couple prepaid their 2017 real estate taxes in 2016, and also made their 2016 and 2017 charitable contributions all in 2016. In that case, for 2016, they'd have deductible expenses of $22,500. That's far above the $12,600 standard deduction, so they'd itemize and get nearly $10,000 in extra tax savings.
For 2017, the couple's deductible contributions would be only $2,500, because they would have prepaid the 2017 real estate taxes and charitable contributions. However, they'd still be entitled to take the 2017 standard deduction of $12,700. If they used the same cycle every two years, they'd see a pattern of repeated tax savings emerge over time.
Is this strategy practical?
There are some obvious obstacles to using this strategy. For many, coming up with money to pay two years' worth of expenses at one time simply isn't practical. Also, some taxing authorities won't allow you to make payments on property tax bills that far in advance, and so you might be able only to prepay a portion of your tax liability for the following year. However, by planning early in the year, you can save up money in advance that you can then use in December to take advantage of the opportunity to double up.
Thousands of dollars of extra deductions are worth taking a closer look to see if the doubling-up deductions strategy will work for you. That way, you'll make sure you're making your standard deduction and itemized deductions work as hard as they can toward cutting your total tax bill.
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