Year-End Deduction Planning

Categories : Financial, News
November 29, 2023

Most Americans have only a cursory understanding of the personal income tax portion of the U.S. Tax Code, and are content to pass along their required annual Tax Return preparation to a paid professional, or even to a computer program. While we encourage the use of tax professionals (Note: we are not tax preparers), the truth is that very few professional preparers have time during Tax Preparation Season to delve into individual situations to see where improvements could be made for the future.

Beginning in 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) positioned many taxpayers to discontinue itemizing deductions in favor of a new, much higher, Standard Deduction. It worked. However, changing from one method to the other is an annual decision, left to each taxpayer’s option. When choice is involved, a planning opportunity often exists. This is no exception.

Deductible Expenses. Taxpayers have the annual ability to plan deductions and compare them to simply taking the Standard Deduction (SD). Manipulating the timing of some deductible expenses may allow the taxpayer to switch between itemizing and taking the SD by doubling up on some expenses one year, then skipping the year in between in favor of the large SD.

SALT Deductions. Property taxes are included in the $10,000 annual State and Local Taxes (SALT) deduction limit. Homeowners whose Property Taxes are sufficiently under $10,000 annually can effectively double up payments every other year, as property taxes can generally be paid over the course of a few months, usually spanning a year-end. Doing so will help to maximize itemized deductions in the years of itemizing, leaving zero for the SD years.

Charitable Donations. But wait, we’re not done yet. Charitable Donations are not capped by SALT limits. For taxpayers who participate in charitable giving annually, double payments can be applied every other year, enhancing overall Itemized Deductions in the itemizing years.

Medical Expenses. Payments for direct medical expenses and insurance premiums are deductible only in excess of 7.5% of a taxpayer’s Adjusted Gross Income, or AGI. Timing the payment of medical expenses can also contribute to a taxpayer’s ability to exceed the deductible expense target, and add to Itemized Deductions in a selected year.

Income Planning. For taxpayers with variable incomes, timing deductions with an eye toward planning income may pay off in taxes saved. Accelerating or delaying income, usually by deciding when to send invoices for small businesses, is not available to everyone, but those who qualify can often influence a specific tax situation, even if only once in a while.

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