Tax Strategies for Itemizers
By the time you sit down with your CPA to prepare your tax return, the time to strategize and save has come and gone. The end of the year is the best time to look ahead and make small adjustments to help save on taxes.
For some, itemized deductions allow for larger tax savings than the standard deduction. If you itemize your taxes, consider including the following deductions into your tax savings strategy.
Deducting Personal Items
Last weekend I met my new neighbor who just moved in. Apparently she had just donated ¾ of all her belongings as she downgraded to a smaller residence.
I asked her if she kept the donation receipt to which I got a loud, “You mean I could write-off my fur coats and three bedroom furniture sets I donated?!”
In her case, we figured out her donations were so large, she could carry them forward to future years. Tis the season for giving; and giving is deductible.
Deducting a Vehicle
Before taking your old car to the charity auction, first give your tax professional a call. Donated vehicles and other big ticket items can have complex tax rules.
For example, if your car does not sell at auction before the end of the year, you can only deduct up to $500. So, if you can sell it on Craigslist for $1,000, you may come out ahead.
What Are the Tax Implications for Gifting Cash?
If you are looking to gift large amounts of money to a family member, although not a tax deduction for you, you may want to consider splitting the gift between December and January to avoid tax implications for the giftee.
The annual gift exclusion is only $14,000 (per spouse) so anything more would be taxable.
Should You Adjust Your Withholdings?
Did you switch jobs? Get a raise or a nice bonus? Or maybe 2015 was a rough year for income.
A quick phone call to your tax professional and a look at your paystub will let you know if you need to adjust your withholdings. Under-withholding may result in a 10% tax penalty.
On the flip side, if you typically get refunds of $5,000 to $9,000, Uncle Sam thanks you for the free loan. If you’re expecting a huge refund, then reduce your withholdings and consider investing that money.
Is Pre-paying Expenses a Good Way to Save on Taxes?
While deduction bunching isn’t groundbreaking, it can help you save a couple thousand on your tax bill.
It works by pre-paying common itemized deductions in one year – real estate taxes, mortgage interest, charitable contributions, tax prep fees – followed by taking the standard deduction the next year.
For example, a married couple normally has $15,000 of itemized deductions and are in the 25% tax bracket.
By pre-paying for an additional $5,000 of expenses in 2015, they would save $1,250 in taxes for 2015.
Then for 2016, they would take the standard deduction of $12,600 instead of itemizing only $10,000 (since $5,000 was already pre-paid), saving an additional $650 of taxes for 2016.
If it makes sense and you have the cash lying around, make an extra house payment or pre-pay next year’s real estate tax. You’ll save on taxes and give yourself a little cushion.
It goes without saying, but check-in with your tax advisor. And if you don’t have one – or don’t have a good one – may we suggest contacting us at OTA Tax Pros.
Even if it’s a quick phone call to bounce an idea off, tax professionals are highly underutilized for strategizing and planning how to reduce taxes.
Or if you don’t know what tax bracket you’re in, you should at least find that out, because once the clock strikes twelve on New Year’s, time is up.
This infographic is a visual summary of the article.