Tax Question: Accelerating deductions for 2005

[cube_rat]

Can one accelerate their current year tax deductions like prepaying property taxes and January 2006 mortgage interest in December 2005? We need all we can get this year so I'm thinking of creative ways of reducing our tax bill.

 

[riskadverse]

In a word - yes

 

[LOL!]

Yes.  We used to do this when we were on the cusp of itemizing vs standard deduction.   This is called "bunching of deductions".  We would itemize in odd years, take the standard deduction in even years.

Just remember that if you do this, that next December, you can do the same thing (with your 2007 stuff), but your deductions will not amount to as much as this year.  Or you can wait until January 2007 and have a low deduction year for 2006 (and possibly pay more taxes).

Another creative way is to donate appreciated stock held more than a year to charity, then buy the stock right back.

 

[KB]

Yes...as the others said.

I'm bunching like crazy since next year I will have minimal taxible earnings.

What I don't know is if I can still deduct a capitol loss next year with only a couple of thousand dollars of interest income.

 

[shiny]

KB, Capital losses can't be deducted directly against interest income, only capital gains. However, each year you can deduct up to 3k in capital losses against ordinary income (which would include interest income).

 

[KB]

Thanks Shiny..

 

[TromboneAl]

I've done this for years, but it strikes me that through all those years of prepaying, for example, property tax, I only get one year's worth of benefit. Right?

For example, let's say prop taxes are $2,000 per year. The first year that I pay ahead of time, I can deduct more, but from then on I deduct $2,000 per year, same as I would if I never prepaid.

So, am I wasting my time?

 

[cube_rat]

Literally there's a difference of $500 income that could throw from the 28% to the 33% tax bracket. I asked my husband to see if he could defer his salary for the rest of the year.

 

[cube_rat]

I never had to worry about this crap. Luckily I sat on the remainder of our windfall after paying off all non-deductable debts, like our cars and credit cards. Geesh, there goes 15k between the State and Fed.

 

[retire@40]

Literally there's a difference of $500 income that could throw from the 28% to the 33% tax bracket.  I asked my husband to see if he could defer his salary for the rest of the year.

Same comment as your retirement plan question. Ask your local CPA what you can do and what will work in YOUR particular situation.

By the way, if you exceed the 28% bracket by $500, it doesn't throw your entire income into the 33% bracket, just the $500. So it's only a federal difference of $25.

 

[REWahoo]

I've done this for years, but it strikes me that through all those years of prepaying, for example, property tax, I only get one year's worth of benefit. Right?

For example, let's say prop taxes are $2,000 per year. The first year that I pay ahead of time, I can deduct more, but from then on I deduct $2,000 per year, same as I would if I never prepaid.

So, am I wasting my time?

You might be unless you bunch your deductions in one year (for example, pay your 2005 prop taxes in January of 06 and your 2006 prop taxes in December of 06) and itemize your 2006 return. In 2007, you pay no prop tax and use the standard deduction. Then rinse and repeat.

Of course this only works if you can bunch together enough dedutions so that itemizing is more favorable than taking the standard deduction. For those of us without a mortgage , it is a stretch to come up with enough deductions to beat the standard amount.

 

[LOL!]

For those of us without a mortgage , it is a stretch to come up with enough deductions to beat the standard amount.

When I lived in NY without a mortgage, the state income tax alone made it worthwhile to itemize.

Don't forget to bunch charitable contributions as well.

 

[Martha]

As you shop for deductions, be aware of the deduction phaseout provisions as your AGI gets higher. http://www.irs.gov/publications/p17/ch31.html

 

[cube_rat]

Thanks so much to Martha and the rest of the gang. I just sent 10K to the IRS because I forgot a little thing called "estimated tax payments"

 

[maddythebeagle]

I think everyone covered the topic, but you can also look into pre-paying your state income taxes. I have been doing that here in Wisconsin (have to do in December) and they give you an "exemption" to submit to your employer so it isnt taken out of your payroll check for the following year.

 

[cube_rat]

Yep Maddie, I'll be doing some research on the California Franchise Tax Board this evening. I expect our wallet to lighter by another $4-5K.

 

[MJ]

I've done this for years, but it strikes me that through all those years of prepaying, for example, property tax, I only get one year's worth of benefit. Right?

For example, let's say prop taxes are $2,000 per year. The first year that I pay ahead of time, I can deduct more, but from then on I deduct $2,000 per year, same as I would if I never prepaid.
So, am I wasting my time?

It's only good if you expect your next year's income to be much lower. For example, if the current year was your last year of work and you expected to have a much lower income the following year.

 

[maddythebeagle]

It's only good if you expect your next year's income to be much lower. For example, if the current year was your last year of work and you expected to have a much lower income the following year.

The other thing that I am thinking about is if you have a smaller mortgage and it is getting paid down. Once that happens, your standard deduction is going to be equivalent. Then alternate the standard deduction with the itemized. Every other year lump local and state property tax payments.

 

[TromboneAl]

I forgot a little thing called "estimated tax payments"

One year I prepared my September estimated tax payment, put it in the envelope with a stamp, and then, for some reason, put it in the tax file folder instead of mailing it.

 

[MJ]

One year I prepared my September estimated tax payment, put it in the envelope with a stamp, and then, for some reason, put it in the tax file folder instead of mailing it.

It's only natural, a part of you really didn't want to pay the fricken tax.
The adult in you took care of busines as usual but the child in you said "not this time".

 

[TromboneAl]

And we both had to pay the penalty.

 

[cube_rat]

It's only natural, a part of you really didn't want to pay the fricken tax.
The adult in you took care of busines as usual but the child in you said "not this time".

Exactly!

I'm still reeling from the reduction in my bank account. It was hard pressing the submit payment button for the IRS and Franchise Tax Board

 

[HFWR]

As a wage slave on direct deposit, out of sight, out of mind... But at tax time, the total is depressingly large...

 

[Outtahere]

It's even more depressing when you have to add several thousand to what's been taken out of your paycheck every two weeks. I have to start reminding one of my partners about two weeks before the due date, he just can't bear to pay taxes, his mind blanks it out so much so that he's been late several times to the tune of a couple thousand in penalties.

 

[JohnnieRed]

Maybe...watch out for Alternative Minimum Tax