Rules for Bunching Itemized Deductions

[magellan_nh]

I've read columns about being able to bunch itemized deductions such that every other year you alternate between taking the standard deduction and itemizing.

As I understand it, the main expense that can be bunched is the property tax payment. By paying the December bill a couple of weeks late, you can move the expense into the next year. In the following year, you can pay on time so you get three payments in one year and one in the following year (assuming a 6 month tax cycle). I've even heard you can pay ahead 6 months so you effectively put 2 years of property tax into one year.

Does anyone know the rules for this and has anyone done it? Also, are there any other (legal) tricks that help with this bunching strategy?

Jim

 

[d]

i believe it is as simple as it sounds ... just make the payment in the year you want the deduction.

 

[FIRE'd@51]

You can also prepay the January estimated payment for state income taxes in December if you want the deduction in the current year. A couple of caveats though.

Keep an eye on the AMT so you don't trigger it, because if you do, you lose all the state and local tax deductions.

Be careful about paying property taxes late. Many places assess fairly steep penalties on payments made after the due date.

 

[maddythebeagle]

I have been doing this.....I prepay my property taxes....I can also prepay my state income taxes (my state has a form on their dept. of rev. site)...You can also pay an extra mortgage payment (13 rather than 12)...

I do it to get me in a lower tax bracket and just keep receipts of when they were paid...as said, watch out for amt....somebody in another thread said that they prepaid and werent able to deduct so just lost interest on their own money...

 

[magellan_nh]

Thanks for the info. I hadn't thought about moving state tax payments. Prepaying Jan in December sounds like a no-brainer. For the off years, I'll have to do the math on the penalties for not paying on time vs the tax savings. For property taxes, the penalty is just a 10% annualized interest charge. Since the bill is due in mid December, the interest is only a two weeks or $20-$40.

Also, not sure if this is the norm, but for property taxes, I get billed in June and in December. Does anyone prepay a full 6 months (in December for the upcoming Jun bill)?

 

[Empty Pockets]

I tried this for a couple of years but quit. AMT is one reason. Another is Another is the PITA effect, it didn't amount to enough for me to make it worthwhile. That is just my individual case, it may be worthwhile for others.

The biggest reason was a personal one regarding charitable contributions . I like to give to my favorite charities whenever I want when the need arises. I don't like to do it every other year, even though I'd double up in the years that I did contribute. It really bothered me to put down a big $0 under charitable contributions when I brought my figures to my CPA.

 

[magellan_nh]

Charitable giving is really easy to bunch, as long as AMT isn't an issue.

Both Fidelity and Vanguard (and others) offer charitable gift trusts. You fund these accounts with cash or with appreciated assets and you get the tax deduction in the year you make the deposit to the account. They generally have minimum initial investments of $10-$25k. Once the account is set up, you can designate gifts (min gift is between $100-$250) whenever you want to any legit charity. In the meantime, the account balance is invested in a money market or in mutual funds.

I've used this for years and it's a really great way to separate the tax deduction from the actual gifting. In fact, in one very good year before I retired, I funded the account with a mutual fund that had a 200% gain. It was actively managed, had high fees, and I didn't want to hold it anymore (early investing mistake). The gift trust let me dump the fund, get a huge tax break in a year I really needed it, and fund my charitable giving for many years to come.

Jim

 

[OAG]

Very simple to do. I had mentioned this in a previous thread as something to do to reduce Federal Income taxes for TY 2006. I usually do not have enough deductions to itemize. However, after moving to OH, the State Income Tax becomes an itemized deduction along with Medicare Part B Premiums (both of us are under Medicare as of 2005) along with a deduction for a new set of dentures which happened in 2006. Also, in the medical part of Schedule A, the travel to medical appointments is also a deduction, not very much, but once on Schedule A there are lots of little stuff you may have ignored.

I can itemize every other year, taking the standard deduction in alternate years. While the RE taxes are high, paying them on line is quick and effortless -- after entering the payment they give you a dated receipt that you can attach to your file copy of the tax return for your records.

Another deduction that is not on Schedule A but on page 2 of IRS Form 1040 is for several energy items. These deductions, while valid, are sometimes missed.