The Standard Deduction May Be Costing You
Only about a third of Americans file income tax returns using itemized deductions. Unfortunately many of those who don’t itemize are overpaying their taxes. Don’t wait until tax time to figure out if itemizing your deductions yields a lower tax bill. Start now to review your situation and plan for a reduction in your taxes by the end of the year.
The standard deduction for 2017 is $6,350 for individual taxpayers and $12,700 for married couples filing jointly. If you can identify deductions over these amounts, your taxable income will be lower. The first step in this process is to estimate your known itemized deductions. Start by breaking out your potential itemized deductions into these five piles.
Pile #1: State and local taxes. You may deduct state and local taxes on either property or sales, but not both. If you live in a place with high property taxes, or you’ve made big purchases during the year and paid a lot in sales tax, this could be a big source of itemized deductions.
Pile #2: Mortgage interest. You can deduct interest paid to secure a primary or secondary residence. Since interest payments are front-loaded onto the early years of a mortgage, this is a big deduction for new homeowners.
Pile #3: Charitable contributions. Contributions to qualified charities can be used as itemized deductions. This includes cash donations, non-cash donations, and even mileage on behalf of qualified charities.
Pile #4: Medical expenses. Medical expenses greater than 10 percent of your adjusted gross income can be deducted from an itemized tax return.
Pile #5: Miscellaneous itemized deductions. With miscellaneous itemized deductions, you can generally deduct the total that exceeds 2 percent of your adjusted gross income. There are many potential deductions, such as:
- Job-related clothing and equipment
- Unreimbursed job expenses
- Job-hunting expenses
- Tax preparation fees
- Casualty and theft losses
Total up your potential deductions, remembering to only count the deductions for miscellaneous and medical expenses that exceed the adjusted gross income thresholds.
Ideas if you are close
If you are close to your standard deduction threshold, here are some ideas to push you over the line.
Donate stock. If you donate cash to a favorite charity, consider donating profitable stock held more than one year. Not only will the donation be an itemized deduction based on the current value of the stock, the long-term gain will not be taxable.
Make two years of giving in one year. Since you can claim donations when paid, consider prepaying next year’s donation in the current year. This effectively doubles your donations for one year, allowing for a higher itemized deduction total.
Pay taxes prior to year-end. The same technique can be used with property taxes and other tax payments. Make next year’s payments in December of the prior year. This will effectively put two years of taxes into one filing year. While you may not be able to itemize deductions every year using this technique, it can yield a lower tax bill this year.
Defer income. A good option for small businesses is to delay the receipt of income, which lowers the threshold for claiming medical expenses and miscellaneous deductions.
On occasion, shifting deductions may result in using itemized deductions in one year and the standard deduction in the next. However if you plan well, you’ll have a lower total tax burden over the course of both years. Please feel free to ask for help if you wish to review your situation.