With the end of 2018 in sight, naturally our minds turn to the upcoming tax season. And this year, there’s plenty of change to consider. With the advent of the Tax Cuts and Jobs Act, one of the biggest changes for individual filers is to deductions. With the introduction of higher standard deductions and the elimination and restriction of certain itemized deductions, many people may find that they are on the hairy edge of itemization. I’m passing on the following from Forbes.com, which provides some last-minute maneuvers available to taxpayers who find themselves in such a position…
For the typical taxpayer who does not itemize deductions, 2018 brings a much larger standard deduction ($12,000 for singles, $24,000 for married filing jointly). Generally speaking, this could be great for many people.
On the other hand, it means you may not actually get a tax break for many of the typical itemized deductions. Think donations to charity, mortgage deduction, property taxes and even medical expenses.
If you are near or below the standard deduction threshold, you may benefit from what is becoming known as “bunching”. Put plainly, this means postponing or accelerating deductions into one tax year so you can capture a tax deduction for them.
Here are a few of the most common areas people can bunch tax-deductible expenses:
Property Taxes - Depending on your local deadlines, you may be able to make three payments, instead of the typical two, in a single year. That would mean you would only have to make one payment in the opposite year. You pay the same amount in property taxes but increase your deductible amount. By doing so, you lower your net after-tax cost.
Mortgage Payments - You can try and squeeze 13 mortgage payments into one year. Bunching payments in this way would allow you to capture more of the mortgage deduction. That would also result in having to make only 11 payments the following year. Again, same amount paid to your mortgage, but you lower your net after-tax cost of living in your home.
Charitable Contributions – Not everyone is intrinsically motivated to donate. The reality is that tax deductions for charitable contributions is a motivator to donate (for some people at least). This tax deduction also means we can potentially afford to donate more money. Some tax-savvy donors are bunching two years of donations into a single year in order to get a bigger tax break.
Medical Expenses - If you have a large number of medical expenses and will be itemizing this year, consider incurring more medical expenses. Are there tests or treatments that you have been avoiding? It may be smart to bunch them together. You may end up with a larger tax deduction. In many cases, you will also have hit your deductible thereby leaving the insurance company on the hook to pick up more of the tab. Win. Win.