By Carl Marzolf, CPA
As a taxpayer, knowing when to pay tax deductible expenses can significantly lessen your individual tax burden.
When computing your taxable income, the IRS gives taxpayers two options: take the standard deduction set by the IRS, or itemize your deductions (which includes items like real estate & state taxes, mortgage interest, and charitable contributions paid in the current year).
Taxpayers have considerable discretion as to the timing of payments of certain itemized deductions. Items like real estate taxes and estimated state tax payments can be paid before or after December 31st and charitable contributions can be concentrated in a more beneficial year as well. In Wisconsin you can even prepay your entire estimated taxes for the upcoming year by filing Form A-115.
A way to reduce the amount of total tax owed is to accelerate enough itemized deductions into the current year to make the subsequent year’s itemized deductions below the standard deduction (or vice versa). This way of reducing your taxes is called doubling up or bunching.
As an example, assume the following:
- You and your spouse both make $50,000 in wages totaling $100,000 for a given year
- Throughout a normal year, you and your spouse have $15,000 of itemized deductions comprised of the following:
- $7,500 in real estate taxes due January 15th of the following year
- $5,000 in state estimated payments; which can be prepaid in the prior year
- $2,500 in charitable contributions
If you and your spouse pay all of your itemized deductions in the year that they are due (assuming 2008 rates & exemptions for subsequent years), you will pay a total of $48,776 in federal taxes over a four year period:
Typical itemized deductions schedule.
By accelerating itemized deductions into the current year and taking the standard deduction in the subsequent year, you will pay a total of $43,740 in federal taxes over a four year period:
The benefits of doubling up your itemized deduction.