The goal in filing a tax return is to pay the minimum tax possible. The tax laws give you plenty of opportunities to reduce your taxable income, with valuable credits and deductions that result in paying less tax. However, you always have to make a key choice when you file your returns: electing to take the standard deduction or itemizing your deductions.
The boost to the standard deduction under tax reform made more people than ever better off by taking it rather than itemizing. However, there's a strategy that some taxpayers can use to extract even more tax benefits from itemized and standard deductions. By doing so, you'll make maximum use of certain deductions when you can while taking advantage of the standard deduction when it makes the most sense.
Why the standard deduction is so popular
It's easy to understand why taxpayers would want to take the standard deduction. In order to itemize, you have to keep track of all your deductible expenses throughout the year. Things like interest on home mortgage loans, taxes paid to state and local governments, charitable contributions, and a host of other less common provisions all have to go on a special tax form. In many cases, those numbers have to be accompanied by documents and records to support your taking them.
By contrast, taking the standard deduction is easy. You don't have to do any work, other than looking up which standard deduction amount is appropriate to your filing status.
With the standard deduction having nearly doubled between 2017 and 2018, fewer people have itemized deductions that are close to the standard deduction amount. However, there are still many taxpayers who fall into that category -- and if you're one of them, then you can use a simple method to milk a little bit extra in tax savings from the IRS.
Having your cake and eating it, too
Because you're never bound by what you did the previous year in deciding whether to itemize or take the standard deduction for the next year, the ideal situation if your itemized deductions are right around the standard deduction threshold is to bunch up deductions into a single year. That way, you'll itemize one year and get a bigger deduction, but the next, you'll still have the standard deduction backstopping you.
Here's how it works in practice. Say you typically have deductible expenses of $23,000 each year, with $10,000 in mortgage interest, $6,000 in local real estate taxes, and $7,000 in charitable gifts. In 2018, the standard deduction for joint filers was $24,000, and it went up to $24,400 in 2019.
If you don't do anything special, then your itemized deductions will always be less than the standard deduction. You'll therefore never itemize, just getting the standard deduction amount to go against your taxable income.
However, consider if in 2018, you had prepaid the second half of your property tax bill that usually comes due in 2019. In addition, say you'd decided to make two years' worth of charitable contributions at once, getting them done in 2018. If you'd done that, then your itemized deductions for 2018 would've been $10,000 in mortgage interest plus $9,000 in real estate taxes plus $14,000 in charitable gifts, or $33,000. You'd therefore itemize, and your taxable income would be $9,000 lower than if you'd taken the standard deduction.
For 2019, your deductions would be much lower. You'd owe only half a year's worth of real estate taxes and have no charitable deduction, so your total itemized deductions would be just $13,000. But you still have access to the same $24,400 standard deduction -- which you'd use.
Get savings over the long run
Using this strategy takes effort. Cycling back and forth with your deductions between one year and the next requires some coordination, and your finances have to be in a position in which you can make early payments in areas like charitable donations and real estate taxes. In addition, the rules for prepaying a full year's worth of property tax early vary from place to place, so it might not be permitted in your area.
Nevertheless, it's worth a closer look to see if you can potentially get thousands in extra itemized deductions. Doing so will ensure that you're taking full advantage of all the tax breaks you're entitled to take.