Let's all sing the praises of tax-cutting techniques. We look at one in today's 12 Tax Tips of Christmas, bunching your expenses to maximize deductions.
There are lots of expenses that the IRS will allow you to use as deductions against your income. However, in many cases they have a major drawback: They must total a certain percentage of your income before they can be claimed.
Take medical expenses, for example. To include these as an itemized deduction on your Schedule A, you must ring up enough to exceed 7.5 percent of your adjusted gross income (AGI). Even with today's high medical costs, that percentage is a tough number to make for most folks unless they've had an especially bad health year.
Worse, if you do get to the threshold, you only get to write off the amount that's greater than the percentage dollar amount. So if your medical percentage target is $3,000 and you have $3,300 in allowable medical costs, you can only claim $300.
The same rules apply to miscellaneous deductions, which require you to exceed 2 percent of your AGI before you can claim these costs as itemized deductions.
So that you don't keep getting close but never quite have enough expenses to deduct, set up a bunching strategy. Here you push as many of your allowable expenses into one tax year as you can. This will mean delaying some medical procedures for a while or joining a few more professional organizations sooner rather than later, or vice versa.
When you do bunch your expenses and are able to itemize more in one year, remember that the next filing season you'll have very few allowable deductions to count. But that's OK. At least getting the most out of your allowable itemized deductions every other year is better than falling short in your deductions every year.
In those leaner itemized expense years, just tally what you can, such as your no-threshold mortgage interest, property tax and charitable gift deductions. Or look into taking the standard deduction then instead of messing with a Schedule A at all.
Related posts:
- The 12 Tax Tips of Christmas: #1 Sell Assets
- The 12 Tax Tips of Christmas: #2 Improve Your Home
- The 12 Tax Tips of Christmas: #3 Spend Your FSA
- The 12 Tax Tips of Christmas: #4 Be Charitable
- The 12 Tax Tips of Christmas: #5 Do a Mock Return
- The 12 Tax Tips of Christmas: #6 Watch Out for AMT Issues
- The 12 Tax Tips of Christmas: #7 Defer Income
- The 12 Tax Tips of Christmas: #8 Make House Payments Early
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