Tips For Taxpayers Who Can No Longer Itemize

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If you have eliminated or substantially reduced your mortgage debt, you may have found that you no longer have enough itemized deductions that exceed the Standard Deduction.

Tips For The Taxpayer

A gain in tax savings can result from a little planning in certain situations. Many individuals that have eliminated or substantially reduced their mortgage debt now find they can no longer claim Itemized Deductions. The elimination of the mortgage also eliminated the largest tax deduction for individuals. With the interest deduction no longer available, the sum of the other itemized deductions will total somewhere below the Standard Deduction amount. After a few years of failing to surpass the standard deduction level, the taxpayer quits trying to "File the Long Form."

There is a way to reclaim the benefits of filing itemized deductions. With the mortgage out of the way, the taxpayer is now able to utilize the ability of being a cash basis taxpayer. Income is taxable when received and expenses are deductible when paid. Rather than try to surpass the Standard Deduction amount annually, pay the expenses every other year. Pay double the property taxes, donations and other deductible expenses in one year. Then pay no one the following year. The result will normally succeed in filing itemized deductions every other year.

Here's how you might do this. Let's say that your "potential" itemized deductions are:

Real Estate Taxes $2,300
Charitable Contributions 3,500
Miscellaneous Deductions 200

Total Itemized Deductions $6,000

With an assumed Standard Deduction of $7,000, you would only be able to claim a $7,000-deduction on your tax return. "Not too bad", you say? What if you pay double these expenses every other year and nothing every other year. Example:


Year 1

Year 2 Year 3 Year 4 Year 5 Year 6 Total
Real Estate Taxes $4,600 $0 $4,600 $0 $4,600 $0 $13,800
Charitable Contributions 7,000 0 7,000 0 7,000 0 21,000
Miscellaneous Deductions 400 0 400 0 400 0 1,200

Total Itemized Deductions $12,000 $0 $12,000 $0 $12,000 $0 $12,000

Standard Deduction $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $42,000
Amount Claimed on Tax Return $12,000 $7,000 $12,000 $7,000 $12,000 $7,000 $57,000

Deduction Increase $5,000 $0 $5,000 $0 $5,000 $0 $15,000

In this example, you will be able to claim $15,000 more in itemized deductions over the 6-year period than you would if you took the Standard Deduction each year. How can you afford to pay double in one year? Take, for example, real estate taxes. In Year 1, pay your previous year's taxes in January and pay your current year's taxes in December of the same year. Now you can claim both payments in Year 1.

With practice, this strategy works well. You can often achieve the magic of claiming the medical portion of itemized deductions which most people have not done since the threshold was increased to 7.5% of AGI. In the old days when the mortgage payment had to be paid every month, the taxpayer got even by claiming the mortgage interest on the tax return. But realize that all of the deductions claimed were backed up with a canceled check and a hit on the personal cash flow. With this strategy, the taxpayer may end up with tax deductions in a pair of years that substantially exceed the sum of the canceled checks.

Other Tips:

  • When choosing a broker or investment service, consider the investment company's reporting method. Ask to see a sample statement to be sure you can easily read and understand transactions posted to your account. Also, ask if your annual statement will show your cost basis on each stock or mutual fund you sell during the year. You or your accountant will need this information to complete your annual tax return however, not all companies provide this report.