Occasionally, while preparing somebody's tax return, it appears that they just barely fall short of being able to itemize deductions instead of taking the standard exemption.
First, some history. The standard deduction was created to make lives easier for many taxpayers and the IRS. By building into the tax law a "minimum" itemized deduction amount, the burden of keeping all the medical, tax, mortgage, charity and miscellaneous expense records is eliminated for many taxpayers. For the standard deduction folks, no more arguing with the IRS over whether the value of those old clothes given to FISH or Goodwill, etc., is worth $250 or $450.
For the few who still have more actual itemized deductions than the standard deduction limits, they do need to keep all those receipts (in case they're audited by the IRS).
This column focuses on those folks who fall short by only $1,000 or so. What can they do to save taxes? Currently, they can't itemize each year unless they have some major change in their lives.
There is a way to save taxes. It is based upon the simple concept of most taxpayers being automatically on a "cash basis." In other words, you get a deduction in the year you actually paid for something.
With the "cash basis" concept in mind, a taxpayer can then "bunch up" their deductions into one year. If they pay property tax, they write a check for the following year tax in December and deliver to the county assessor. If they have a mortgage, they pay the January payment in December. If they give to their church or some other nonprofit organization, they write a check for the whole next year planned gift in December. They pay their tax preparer in December for the upcoming tax preparation the following year.
People who do this try to time any large purchases (TV, washer/dryer, refrigerator, car, etc.) all in one year, to bunch up the sales-tax deduction. If they have enough medical expenses to cross the 10 percent of adjusted gross income threshold, they pay all the doctors in December for any anticipated visits in the early months of the following year. They purchase all the normal prescriptions for the following year in December.
The goal is to pay in one year for as many as possible of the normal itemized deductions that would occur over a two-year period. This way, you get to itemize in one year (taking a higher deduction than the standard deduction) and then get the standard deduction for the other year (which will now be considerably higher than your remaining "cash basis" itemized deductions).
Basically, if you are in the 15 percent tax bracket and can bunch up your itemized deductions into every other year by $2,000 over the standard amount, you just saved $300 in tax over those two years. Is that enough to make it worth it? You decide.
Did you hear? "There is nothing sinister evil or wrong about arranging your affairs in order to reduce the amount of tax you pay. Because tax is an enforced extraction, not a voluntary contribution," by Judge Learned Hand, U.S. Court of Appeals 2nd District 1939-51.
• Kelly Bullis is a certified public accountant in Carson City. Contact him at 775-882-4459. He's on the Web at BullisAndCo.com.
