Tax Strategy – Itemized Deduction Grouping

Kevin McMullen for dagoodolboys.com writes: Do you own a home or give to charity in Oshkosh or the Fox Valley?  If so, timing certain payments can save you hundreds of dollars in taxes by grouping your deductions in certain calendar years. Tax Relaxer is available to help you maximize your deductions.

You may already know that you receive a tax deduction for paying real estate taxes, mortgage interest, and contributing to certain charities, but timing these payments can make all the difference. A well-known tax strategy called grouping deductions can be employed to create additional deductions just by knowing the tax code. Below is a simplified example of this strategy:

A homeowner makes $50,000/yr and contributes $1,000/yr to the Oshkosh Area Humane Society. In addition, he pays $2,500/yr in mortgage interest and $3,000/yr in property taxes. In 2013 he can pay the amounts each year with no tax planning and would itemize his deductions to total $6,500. He would contribute the same amounts in 2014 and itemize his deductions to the same $6,500.

With Tax Relaxer’s guidance, the homeowner mentioned would be able to create an additional $3,600 dollars in deductions by grouping payments.

The first step is to plan when to pay your real estate tax payment. In 2013, the homeowner would normally payproperty taxes for 2012- often in the first few months of 2013. Then, rather than paying 2013 taxes in 2014, the homeowner would pay the real estate taxes in 2013, effectively paying $6,000 in property taxes for the 2013 calendar year. In addition, by donating $2,000 during 2013 and not splitting the contribution by calendar year, the homeowner creates $2,000 in deductions for 2013. In total, the homeowner has $6,000 in real estate tax deductions, $2,000 in charitable contribution, and $2,500 in mortgage interest for a total of $10,500 in federal tax deductions.

The following year, the home owner would take the standard deduction at $6,100 because he would not have enough deductions to itemize by design. The only itemized deduction he would have is mortgage interest of $2,500, well below the $6,100 standard deduction. The ending result is $16,600 in total deductions. Without planning and itemizing in both 2013 and 2014, the homeowner would have $13,000 in total deductions. The difference is $3,600 and may not seem significant. However, the additional $3,600 in deductions can translate to an extra $500 – $750 in tax refunds at the end of the year!