Q. - How can I maximize the benefit of my itemized deductions?
A. - When you pay your tax-deductible expenses can significantly increase the benefits you receive from these deductions.
Matthew Eckelberg, C.P.A.
Hawkins, Ash, Baptie & Company, LLP
In completing your annual tax return, you have the option to take the standard deduction or to itemize your deductions. The most common itemized deductions are real estate (property) taxes, state income taxes, mortgage interest, and charitable contributions.
Although you may not have enough deductions to itemize every year, you may be able to reduce your total tax liability over a two-year period. Simply plan to pay deductible expenses to maximize your itemized deductions in one tax year. You would take the standard deduction in the subsequent tax year. We call this "doubling up" itemized deductions.
Taxpayers have considerable discretion in the timing of payments of certain itemized deductions. For example, real estate taxes can be paid before December 31 if you plan to itemize in 2012, or after January 1 if you plan to itemize in 2013. Charitable contributions can be made on the same schedule. Even the payment of state income taxes can coincide with the tax year you are planning to itemize your deductions.
Note, however, that by doubling up your real estate taxes, you will probably lose the Wisconsin Homeowner's School Property Tax Credit, usually $300 per year. Be sure to consider this in your planning.
By properly timing the year of your deductions, you can take advantage of tax rate bracket changes due to known tax law changes or known changes in your income. For example, if you expect to have a significant change in your income for the next tax year, time the payment of your itemized deductions to the year with the higher marginal tax bracket.
Note also that the itemized deduction limitation is scheduled to be reinstated for higher income taxpayers in 2013. If you will be subject to this limitation, you may want to accelerate your charitable giving or the payment of real estate or state income taxes into 2012, when these deductions are not subject to the upcoming limitations.
If you are subject to the alternative minimum tax (AMT), bunching your deductions into one tax year may not reduce your total tax liability. Some items, such as real estate taxes and state income taxes, are not deductible in computing AMT.
Please consult with a tax advisor for more information.
For additional information on making a planned gift to Marshfield Clinic, please contact:
Karen Piel, J.D., C.P.A., CFRE
Planned Giving Officer