Reduce Your Income Tax by Alternating Deductions
Published by Hamilton Software, Inc. on June 20, 2015 | Comments
If you've already paid off your mortgage, you've probably discovered that
taking the standard deduction is a better deal than itemizing. It's hard to find
sufficient deductions on your schedule A without mortgage interest. But there
may be several hidden in plain view.
You have expenses every year that are washed out by the standard deduction,
but doubling up on those expenses in alternating years can enable you to itemize
every other year, thus getting a larger deduction in those years.
Property Tax: While
your county only requires you to pay yearly property tax payments, many counties allow
you to prepay next year's tax this year. The IRS allows you to deduct real
estate tax you paid during the tax year, regardless of which year it is
for. So if you pay your property tax normally in 2018, but also prepay 2019's
property tax in 2018, you will double the property tax deduction for 2018's
schedule A.
State Income Tax: Your state income tax due for the year can be
deferred until January of the following year (usually with a small penalty). So
if you postpone 2017's state income tax until January of 2018, but pay your 2018
tax fully by the end of the year, you will have paid two years' worth of state
income tax in 2018, doubling the allowable deduction on your schedule A. Again,
the IRS allows you to deduct tax you paid during the tax year, regardless
of which year it was for.
Charitable Contributions: Save all your charitable contributions
and donations for alternate years as well, since these are only deductible if
you itemize.
By doubling all these deductions, you may discover what you can claim by
itemizing exceeds the standard deduction. In the alternate years, you won't have
a property tax payment or a state income tax payment to make, so you will simply
claim the standard deduction. By alternating deductions year to year (itemize,
standard, itemize, standard, etc), you can reduce your income tax every other
year.
Check with your tax advisor and do the math before using the strategy. Also
check with your county to make sure they will accept tax prepayments, and be
sure to account for the penalties for deferring your state income tax.