It’s not too late to make these tax-saving moves.
Before acting on our recommendations, be sure to gauge your 2012 income expectations. Moves you make this year may affect next year’s taxes, detailed in the table below.
Game the Standard Deduction
If your total annual itemized deductions are usually close to the standard deduction amount, consider the strategy of bunching together expenditures for itemized deduction items every other year, starting with this year.
Itemize in alternating years to deduct more than the standard deduction. Then claim the standard deduction in the other years. Over time, this drill can save hundreds or even thousands in taxes by increasing your cumulative write-offs. That’s because you’ll bag higher itemized deductions in alternating years and relatively generous standard deductions in the other years. So regardless of what happens with tax rates, you’ll come out ahead.
For 2011, the standard deduction is $11,600 for married joint-filing couples, $5,800 for singles, and $8,500 for heads of households. For next year, the standard deduction amounts will be $11,900, $5,950, and $8,700 respectively
Prepay Deductible Expenditures If You Itemize
If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2011 write-offs makes sense if you expect to be in the same or lower tax bracket next year. (See the table at the end of this article for the 2012 tax brackets.)
Perhaps the easiest deductible expense to prepay is the interest included in house payments due on January 1. Accelerating that payment into this year will give you 13 month’s worth of deductible interest in 2011. You can do the same with a vacation home. If you prepay this year, you’ll have to continue the policy for next year and beyond. Otherwise, you’ll have only 11 month’s worth of interest in the first year you stop.
Next up on the prepayment menu are state and local income and property taxes that are not actually due until early next year.
Next, consider prepaying expenses that are subject to limits based on your adjusted gross income (AGI). The two prime candidates are uninsured medical expenses and miscellaneous itemized deductions. Medical costs are deductible only to the extent they exceed 7.5% of AGI. Miscellaneous deductions–for investment expenses, job-hunting expenses, fees for tax preparation and advice, job hunting, and unreimbursed employee business expenses–count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into a single calendar year (like this year), you’ll have a fighting chance of clearing the AGI hurdles and getting some tax-saving write-offs.
Warning: The prepayment drill may be a bad idea if you know you’ll owe the dreaded alternative minimum tax (AMT) for this year. That’s because write-offs for state and local income and property taxes are completely disallowed under the AMT rules, medical expenses must exceed 10% of AGI to be deductible for AMT purposes, and miscellaneous itemized deductions are completely disallowed under the AMT rules. Therefore, prepaying these expenses may do little or no tax-saving good for AMT victims.