January 13, 2010

When It Is Worth Moving Tax Deductions From One Year to Another

If you can move a significant chunk of your itemized deductions from one year to the next then it might save you on your taxes.   Are you just short of having enough deductions to itemize but you're able to move your deductions from one year to the next?  IF so then it might save you some taxes to move those deductions and consolidate your itemized deductions in one year.

Everyone gets at least the standard deduction no matter what.   So if you have deductions that could be itemized but which aren't enough to exceed thee standard deduction then carrying them forward another year might pay off.  

Simple example: If your only itemizable item is  $5,000 of charity a year then thats not enough to exceed the standard deduction, but if you made donations of  $10,000 in one year and nothing the next year then you can itemize and claim the full $10,000.

Here is a more detailed example:  

Emily is a single person making $45,000 a year.  She rents and does not have a mortgage deduction.   Her state taxes run her about $2,700.  Her only other itemized deduction is her charity contributions.   She gives  $2,500 a year to charities via cash contributions and donated items.   Between her state income tax and charity deductions her itemized deductions come out to $5,200 a year.   This is below the standard deduction ($5,450 for 2009) so it doesn't pay for Emily to itemize.    However if Emily delayed her charity giving from one year and instead gave double the next year she could claim $5,000 in charity giving for that year.   In other words instead of claiming $2500 in 2009 and $2500 in 2010 she could give $5000 in 2009 and $0 in 2010.   For the one year with double charity giving combined with the state income tax she pays she would have $7,700 in itemized deductions for that year.  Then for the year with no charity giving she could just claim the standard deduction.  With a standard deduction her tax bill is $5,200 but with the $7,700 itemized deductions she'd drop her taxable income by $2,250 and cut her tax bill by $547 to $4,653.

Even if you do have enough deductions to itemize then it can still make sense to move some itemized deductions from one year to another.

Another  example:  A married couple who has $9,000 in deductions from mortgage interest, property tax, and state income tax plus $3,000 in charity donations a year.   Normally they have $12,000 in deductions per year.   If they make $6,000 in one year and $0 in the next year they'll have $15,000 in one year and claim the standard deduction of $10,900 the next year.   Thats a $1,900 reduction in taxable income.

When it doesn't make sense

If you have annual deductions that that you can't really move and are more than the standard deduction then you won't benefit by moving other deductions.   

Here's an example:  Say you're a single person making $75,000 and you pay $6,000 in state income taxes.   The $6,000 is above the standard deduction so you will want to itemize in any case.   You'll get the full benefit of your other deductions

Generally if your mortgage interest, state taxes and or property taxes add up to more than the standard deduction then you may as well itemize every year.

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