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Time Your Deductions to Maximize Tax SavingsApr 01 '00 Write an essay on this topic.So you keep careful track of all your deductible expenses in order to maximize your tax savings. That's great, but you could do even better by timing your deductions for maximum impact. What the Heck Are You Talking About? You have to claim a deduction in the year that you pay the deductible expense. For example, if you donate $500 to the Red Cross on December 15, 2000, you have to claim that deduction on your 2000 tax return. Since you have complete control over when you contribute to charity, you should think about doing it at a time when it will have the greatest tax benefit. Maybe it would be better to wait two weeks and make the contribution on January 1, 2001. Why Would I Want to Do This? There are several reasons to consider timing deductions. First, your tax bracket may change from one year to the next, and a deduction is worth more if you are in a higher tax bracket. Second, you may be taking the standard deduction because your actual deductions don't add up to enough for you to itemize. However, if your actual deductions are close to the standard deduction, you may be able to shift some of them into a different year so that they exceed the standard deduction amount, and therefore you can itemize. Third, some deductions, like medical expenses and so called miscellaneous deductions have thresholds below which the expenses are not deductible. For example, only the portion of medical expenses above 7.5% of adjusted gross income is deductible. It may be possible for you to shift some medical expenses so that you exceed the threshold when normally you wouldn't. How Do I Do It? You need to develop a multiyear tax strategy in which you "bunch" deductible expenses into the year they will do the most good. If you decide this year will be a good year for bunching, you can do some or all of the following: 1) make charitable contributions before the end of the year; consider doubling up and making next year's contribution as well; 2) make next year's first mortgage payment before the end of this year (assuming your lender will cooperate in terms of proper reporting of the payment to the IRS); 3) if you have the option to pay a deductible expense this year or next year, pay it this year; this type of flexibility is often available for property tax payments, some medical expenses, and various miscellaneous deductions. On the other hand, if you decide that next year is the better year for bunching, you may be able to delay many of the expenses listed above into the new year. When you use this strategy, your taxes tend to run on a two year cycle. In one year you have lots of deductions, and in the other you have fewer. The point is to maximize your tax savings  |
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