Itemizing vs Standard Deduction for 2015

[JOHNNIE36]

Hello again to all. It's been quite some time since I last posted but have been following the forum on and off for the last year. Health issues have kept me quiet lately. Now I'd like to get your thoughts on an upcoming situation I face for 2015 income taxes. It's called planning ahead.

We moved within the last year into a new home in the same area. Had to get a mortgage because our other house was not sold and didn't want to tap an IRA. We had income to cover the new mortgage but it has put us in a bind. Haven't slept well the the past year with a mortgage over our heads and our other house not sold. We now have a contract on that house and it should close within a couple weeks. We could use the proceeds to pay off the mortgage on our new house but I might be missing the boat on 2015 income taxes. For about the last 15 years we have been using the standard deduction as it tough to beat if you don't have a mortgage.

For 2015, we could possibly deduct the following:
* Mortgage interest of about $9500
* Property taxes on new house-about $3500
* Property taxes on old house-just paid 2014 taxes of $2500

Those items alone gets us past the standard deduction. Then we would be able to deduct some closing cost on sale of old house (state tax), deductions like charitable contributions and big one like a theft loss. Our home was burglarized in January and they got about $25000 in jewelry. I don't know much about casualty and theft ,loss deductions and how it would affect our deductions. But, it's something I'm considering.

On the other hand, I really sleep good when I don't have a mortgage over my head. I've worked my way down to the 15% tax bracket and wonder is the hassle of itemizing is worth all the trouble. Just wondering. Any thoughts on this subject?

[gerntz]

I enjoy your wondering if a few hundred is worth the hassle you perceive while several here obsess over which tax return program to use for +/- $40-50. Quite the difference in perspectives.

[samclem]

Quote:

Originally Posted by JOHNNIE36 . Just wondering. Any thoughts on this subject?

You might be a good candidate for "bunching" your deductions. Since you are into "itemized deductions make sense in 2015" territory, try to lump in as many as you can, then probably just take the standard deduction in 2016 when you don't have these extraordinary itemizable expenses. Things to think about:
-- You say you've had medical problems--do/will the 2015 costs exceed the deductibility "floor" (it's somewhere between 7.5% and 10% in 2015)? Maybe consider incuring any expenses that you'll have anyway (tests, etc) in 2015 so you can deduct them.
-- Property taxes for your new house: Consider paying the 2016 property taxes early, in the final months of 2015. They'll count as itemized deductions.
-- Consider giving early to any charities--make your 2016 and even later year contributions in 2015, if you can swing it. Donating appreciated stocks is a great way to get a write-off for the entire value of the securities without selling them and incurring cap gains taxes. You can even set up a "Donor Advised Fund" to allow you to get a large itemized charitable deduction in 2015, and then disburse the money to charities over a longer period (more on that at this thread)

etc, etc. Look for any future deductible expenses that you'll have anyway and pay them early so you can get the itemized deduction while it still "counts", then probably go back to the standard deduction in subsequent years.

Good luck, and I hope the health problems are in the rear-view mirror.

[samclem]

Quote:

Originally Posted by gerntz I enjoy your wondering if a few hundred is worth the hassle you perceive while several here obsess over which tax return program to use for +/- $40-50. Quite the difference in perspectives.

You've said that already. If it's not of interest to you, just don't do it.

[gerntz]

Quote:

Originally Posted by samclem You've said that already. If it's not of interest to you, just don't do it.

Nothing on here is never repeated? Besides, I'm enjoying the point. And I'm not doing it.

Thank you much for repeating the deductions bunching idea. It should help us.

[Big_Hitter]

Is there a $40-$50 chump change argument I missed? dang it


OP: See which one gives minimizes your taxes. Should be able to do that free online.

[RetireBy90]

Quote:

Originally Posted by JOHNNIE36 Hello again to all. It's been quite some time since I last posted but have been following the forum on and off for the last year. Health issues have kept me quiet lately. Now I'd like to get your thoughts on an upcoming situation I face for 2015 income taxes. It's called planning ahead. We moved within the last year into a new home in the same area. Had to get a mortgage because our other house was not sold and didn't want to tap an IRA. We had income to cover the new mortgage but it has put us in a bind. Haven't slept well the the past year with a mortgage over our heads and our other house not sold. We now have a contract on that house and it should close within a couple weeks. We could use the proceeds to pay off the mortgage on our new house but I might be missing the boat on 2015 income taxes. For about the last 15 years we have been using the standard deduction as it tough to beat if you don't have a mortgage. For 2015, we could possibly deduct the following: * Mortgage interest of about $9500 * Property taxes on new house-about $3500 * Property taxes on old house-just paid 2014 taxes of $2500 Those items alone gets us past the standard deduction. Then we would be able to deduct some closing cost on sale of old house (state tax), deductions like charitable contributions and big one like a theft loss. Our home was burglarized in January and they got about $25000 in jewelry. I don't know much about casualty and theft ,loss deductions and how it would affect our deductions. But, it's something I'm considering. On the other hand, I really sleep good when I don't have a mortgage over my head. I've worked my way down to the 15% tax bracket and wonder is the hassle of itemizing is worth all the trouble. Just wondering. Any thoughts on this subject?

We have a mortgage on our primary home and did a refi about 2 years ago at 3.625% for 30 years. So, I'm a big believer that rates and inflation will go up and make my mortgage seem like a great deal. However, I'm a bigger believer that sleeping well is more important than siting on a great mortgage rate.

Everyone has personal situation and different levels of comfort about taking a mortgage into retirement. But since you asked, I'd suggest you pay off the loan at the earliest date and get back to sleeping all night.

[JOHNNIE36]

Thanks. Now you folks got my juices flowing again on the deductions. Couple more points. I planned on doing this just for 2015, then pay off the mortgage and go back to standard deductions. That's one reason I paid taxes late on the old house (trying to bunch deductions in 2015). Good point about paying 2016 property taxes early. Hadn't thought about that.

My mortgage now is 4.625% and might be able to refinance to 3.625% if it doesn't cost too much. The next question is where to put the proceeds from the house sale. I'm liking Vanguard Wellesley Admiral fund (IRA there now) but don't like all my eggs in one basket. Even for one year.

Now I'll lay in bed at night thinking about my plans for 2015 tax year. I can't win.

[Katsmeow]

Also consider whether you might be able to include medical deductions. For this year and next year those 65 or older can itemize about 7.5% of adjusted gross income. Bear in mind that medical expenses usually do include premiums (including medicare premiums). Also even mileage to go to the doctor is included. Also some stuff that usually isn't covered by medical insurance such as eyeglasses or hearing aids.

Tax Topics - Topic 502 Medical and Dental Expenses

[MamaShe-Ra]

I agree with everyone above that maximizing your deductions in 2015 is the way to go where you can, especially if it is expenses you would pay anyway. However, for the mortgage deduction I think I would lean more toward paying off than keeping it around just for the tax deduction. If I am following correctly, the $9,500 is for a full year of interest. If you paid off by the middle of the year your interest expense would go down by $4,750 and your taxes would go up by $713 from reduced deductions (if you are itemizing in the 15% bracket). Given that, paying off early would be a net benefit of about $4,000.

Of course, it is always possible that you could make more money in the market is the same time frame and still come out ahead. Personally, I prefer to have as little debt as possible so I would pay off the mortgage.

[samclem]

Quote:

Originally Posted by MamaShe-Ra Of course, it is always possible that you could make more money in the market is the same time frame and still come out ahead.

That's the big "what if", and could easily swamp everything else. Your analysis (a net benefit of about $4k) assumes the OP is getting zero return on all the money that he'd take out of his investments (or get from the sale of his other home) in order to pay off the mortgage. That's not realistic.

PS: Welcome to the site!

[LOL!]

We don't pay mortgage interest nor state income tax, yet we are still able to itemize every other year by bunching. Here is how it works:

2014: Itemize includes
2 years of property taxes
2 years of charitable deductions (use a donor-advised fund, too)
1 year of sale tax (only buy cars in years we itemize, too)
~$25,000 to ~$30,000

2015: Standard deduction
$12,600

2016: Itemize (see above)

2017: Standard deduction.

If we did not bunch, we could take half of the itemized deduction in 2014 and the other half in 2015:

2014:
1 years of property taxes
1 years of charitable deductions (use a donor-advised fund, too)
1 year of sale tax
~$13,000

2015: Same.

So a two-year "deduction" total is either
~$38,000 by bunching or
~$25,000 by not bunching whether we itemize or not.

Clearly, bunching saves on taxes by at least $13,000 * 25% / 2 per year or
an average of $1,600 to $2,000 reduced taxes per year depending on amounts given to charity and whether we purchase a car or not. If we end up in the 15% tax bracket, then we save at least $1,000 a year in taxes.

[pb4uski]

I think your deduction for property taxes on the old house will be reduced for any real estate tax reimbursement that you receive at closing, so it will be quite a bit less than $2,500 if the $2,500 is for calendar 2015.

I believe that the 2015 standard deduction for a couple over 65 is $15,100.

If you don't pay off your mortgage with the proceeds, then what would you do with the proceeds... how would you invest it?

[Rickt]

If i were you I would pay off the mortgage and make 4.625% with no risk. (money saved is money earned). Sleeping well at night is an added bonus. Thanks.

[Texas Proud]

+whatever number on bunching....

But I do not save anywhere near the money LOL saves....

Heck, even with bunching I was over by $6K this year... and that was with medical and buying a new vehicle...

But, I will do it to save the money.... even if it is only $40 or $50 (or a bit more )

[scrabbler1]

Add me to the +bunching crowd.


I began bunching deductions in 2013 by putting off some itemized expenses into 2014. That, along with not making any redemptions from my mutual funds, enabled me to file the simple Form 1040A for the first time since 1988.


For 2014, I did the actual bunching and had a little luck along the way. On way to bunch some expenses was to try to make more than 12 monthly HI premium payments in calendar 2014. I was able to make not just 13, but 14 payments. That gave me a 15% "discount" (my marginal tax rate) on the 13th and 14th monthly payments.


I can't bunch property tax payments because I live in a co-op apartment complex but I can bunch my 4th quarter estimated state income tax payments. For 2014, I made the 4th quarter 2013 payment in January of 2014 and the 4th quarter 2014 payment in December of 2014. I happen to pay most of my state income taxes through the 4th quarter estimated tax payment so I get a pretty good bang for the buck.


For 2015, I will pay nearly none of my state income taxes during this calendar year. For me, there are some offsets to bunching. When I itemize, I then have to include a state property tax rebate in the following year, and that counts as MAGI when I add it back, lowering my ACA subsidy. When I take the SD, I don't have to add back the state property tax rebate. Makes it a little tricky to figure out my estimated net income taxes paid less ACA subsidy over a 2 year period.

[gauss]

I didn't realize that I could bunch itemized deductions until last year.

I thought when I paid taxes, paid income tax by others, paid mortgage interest etc was fixed by others.

The thing that really opened my eyes to this was the working of a donor advised fund (in my case Fidelity Charitable).

I was basically able to donate $5,000 to the fund the first year to open it and was able to take the full $5,000 as a charitable deduction. I actually donated appreciated stock that I had on hand in lieu of cash to avoid the CG taxes.

I have been "recommending" small grants (ie $50) to various 501c(3) organizations since opening the fund. It feels like I am donating with other people's money -- which legally I am of course. I have not been denied a grant yet that was to a 501c(3).

I plan to try to bunch deductions now (ie pay property taxes 3 time in 1 year and then 1 time in the next year) along with making future contributions to the donor advised fund in the years I make 3 prop tax payments.

I won't have to donate $5,000 in the future because the account is now open.

This simple strategy opened my eyes to alternative ways to make charitable deductions and insure that I can get to itemize deductions these years.

Check it out if you are not aware of these DAF's yet.

-gauss

[Cobra9777]

I'm a buncher. No mortgage interest, but Texas property taxes are quite high. With other items, I'm usually just shy of the standard deduction. So I double up property tax and charitable contributions every other year and take the standard deduction in between. In effect, it's like 3 standard deductions every 2 years. I like deducting money I never spent. At 25%, I save around $1600 per year in taxes.

[Willers]

Quote:

Originally Posted by Cobra9777 I'm a buncher. No mortgage interest, but Texas property taxes are quite high. With other items, I'm usually just shy of the standard deduction. So I double up property tax and charitable contributions every other year and take the standard deduction in between. In effect, it's like 3 standard deductions every 2 years. I like deducting money I never spent. At 25%, I save around $1600 per year in taxes.

I plan to do the same. I agree that it is like getting an extra deduction every X years. We doubled on property taxes and donations this year assuming that we'd be on the standard deduction next year (we are in between houses and I hope to done next year).

[JOHNNIE36]

Thanks to all for the replies and the good information. We have a closing date of 4-15-15 and we have decided to just pay off the mortgage and save that interest payment for the rest of the year. That's quite a bit. $50K left over will be invested in something which hasn't been determined. It's got to be safe. I still wish PenFed had those 3% certificates that I was able to get a year ago.

I think I'm going to look further in the "bunching" idea. That was a good tip. Sounds like a lot of record keeping which may change my mind. What else do I have to do? Not like I don't have a lot of time on my hands.

Thanks again to all.