You could lower your tax bill by making next year’s
charitable donations before Dec. 31 and prepaying next year’s state and local
taxes. By doing so, you could benefit from a simple tactic that takes advantage
of a feature of the tax system: Each year, taxpayers get to decide how they
want to take deductions from taxable income. The Internal Revenue Service
offers two options. Taxpayers can take the standard deduction, which is $6,200
for a single filer and $12,400 for joint filers. Or they can itemize expenses
such as mortgage interest, state and local income and property taxes, and
charitable donations, which can add up to a larger deduction.
Unless you receive reasonably sophisticated tax advice,
chances are that each year you make the choice that lowers your tax bill the
most for that year. About 70% of U.S. taxpayers simply take the standard deduction,
which is the easier route. But many people can boost overall deductions for
every two-year period by alternating between the two approaches each year. In
the years when you itemize expenses, you make two years’ worth of charitable
donations and pay two years of property taxes. For a typical couple that owns a
home, that could add up to well over $12,400.
The following year, you take the standard deduction, which
could be much more than you would have qualified for otherwise, given that you
would have relatively little to itemize for that tax year.
To be sure, the savings may be modest. Don Williamson, who
heads the Kogod Tax Center at American University in Washington, said the
maneuver is likely to be of marginal benefit to many taxpayers. Those savings
may be welcome nonetheless, especially for those on middle-class incomes.
The technique frequently gets overlooked. Tax planners tend
to focus most on taxpayers with higher incomes or more complex affairs, whose
deductions are so large that it almost always makes sense for them to take
itemized deductions each year. When they recommend paying some of next year’s
expenses early, it is typically to help wealthier clients avoid the impact of
the alternative minimum tax, the parallel tax code designed to close loopholes
in the principal code. Yet even those who aren’t among the highest earners can
benefit from multiyear planning.
The maneuver does have some drawbacks. By prepaying some of
next year’s expenses, taxpayers miss out on the interest they could have earned
on the money.
But inflation is low and so are short-term interest rates,
so the cost is likely minuscule. Meanwhile, low interest rates have reduced the
value of the deduction for mortgage interest, bringing many taxpayers’ total
annual deductions down below the value of the standard deduction.
What’s more, some taxpayers may find it attractive to
simplify their tax filing every other year by taking the standard deduction.
The IRS calculates that the average nonbusiness taxpayer spends about eight
hours a year on tax compliance.
Itemized deductions and standard deductions were designed as
alternatives. But with a little careful planning you can get the best of both
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