Personal Tax Advice: Double Up on Deductions
by Carl Marzolf, CPA
As a taxpayer, knowing when to pay tax deductable 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 up coming 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 estates 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.
The benefits of doubling up your itemized deduction.
In four years by doubling up your deductions in certain years and taking the standard deduction in subsequent years, you could save $5,036 in federal taxes all by timing when you write checks for expenses that you are already paying.
The doubling up technique is most effective for taxpayers who have little or no itemized deductions for mortgage interest expense, due to the difficultly of shifting mortgage interest from one year to another.
A detriment of doubling up your real estate taxes is a reduction in WI’s Homeowner’s School Property Tax Credit, usually $300 per year for homeowners. The credit is allowed for homeowners in the year real estate taxes are paid for their principal residence. In the doubling up technique, real estate taxes are paid in certain years and not in others. By doubling up you forgo the credit in the years in which no real estate taxes are paid.
If you are subject to alternative minimum tax (AMT) doubling up your deductions will not reduce your total tax liability. Items such as real estate taxes and state income taxes are not deductable in computing AMT, so shifting them from one year to another has no effect on the total tax you will pay. People who are most susceptible to AMT have many personal exemptions and/or substantial itemized deductions. High income individuals are also susceptible to AMT due to certain phase outs, which start at $150,000 for married couples filing joint and $112,500 for single and head of household filers.
As with any tax issues your specific situation may vary. Please contact one of our professionals to see if doubling up can help you.