Minimizing Your Taxes and Managing Your Complex Affairs

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Year-End Itemized Deductions Tax Strategy

The standard deduction has almost doubled to $12,000 for individuals and $24,000 for married couples. With the higher standard deduction, fewer taxpayers may claim itemized deductions.

Keep in mind, personal and dependent exemptions were eliminated so doubling the standard deduction is not that impressive.

What planning strategies do taxpayers have to minimize their taxes with deductions that may be itemized?

 

One way to boost the tax benefits  is to “bunch” your deductions (such as charitable donations or medical expenses) into alternating years if this will help you itemize your deductions.

 

Note: Mortgage interest expense may not be prepaid so bunching won’t work. For most taxpayers, bunching state income or property taxes won’t work either due to the new $10,000 combined state income and property tax limitation.

 Example: John and Jane normally have $8,000 mortgage interest, $10,000 of combined state income and property tax (which is a new limit imposed by Tax Reform) and $4,000 of charitable contributions totaling $22,000 in 2018. Therefore, John and Jane will claim the higher $24,000 standard deduction. If John and Jane will have a similar level of deductions for 2019, it would be best if they contributed an extra $4,000 to charity in 2018 and nothing in 2019.

Result: John and Jane have $8,000 mortgage interest, $10,000 of combined state income and property tax and $8,000 of charitable contributions totaling $26,000 in 2018. John and Jane will deduct $26,000 in itemized deductions rather than claim the $24,000 standard deduction. In 2019, they will claim the $24,000 standard deduction. Over the 2 years, they would have deducted $50,000 rather than $48,000.

 

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Richard Pon CPA, CFP