Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as filing status, adjusted gross income levels for deduction phaseout, and the alternative minimum tax. You also have to consider your income for the current and succeeding tax years to determine when claiming deductions will be the most advantageous.
Remember to keep the following in mind:
Standard Deduction Planning: Deduction planning requires consideration of the standard deduction. For 2014 returns, the standard deduction is $12,400 for married taxpayers filing jointly, $6,200 for single taxpayers, $9,100 for heads of households, and $6,200 for married taxpayers filing separately. You need to consider whether or not the standard deduction is more advantageous to you than itemizing.
If your itemized deductions are relatively constant and are close to the standard deduction amount, you may obtain little or no benefit from itemizing your deductions each year. But simply taking the standard deduction each year means you may lose the benefit of your itemized deductions. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of your deductible expenses so that they are higher in one year and lower in the following year. You might do this by paying in 2014 deductible expenses, such as mortgage interest or medical expenses that are not due to be paid until January 2015. Or you might delay paying 2014 expenses into 2015 so as to maximize the available deductions in that year.
Deduction in Year Paid: An expense is only deductible in the year in which it is actually paid. By timing the year in which the deduction is taken, you can enjoy the tax benefit in the year that does the most good, based on your income for the current and following years. The deduction may be more valuable in the following year if you anticipate higher income and/or a higher marginal tax rate. On the other hand, a tax savings today may be more valuable than a potential tax saving in the future.
Payment by Check: Date checks before the end of the year and mail them before January 1, 2015 if you wish to take the deduction for 2014.
Promise to Pay: A promise to pay or providing a promissory note or pledge does not permit you to deduct the expense currently. But you can take a deduction if you pay with money borrowed from a third party. Hence, if you pay by credit card in 2014, you can take the deduction even though you won’t pay your credit card bill until 2015.
AGI Limits: For 2014, the overall limitation on itemized deductions (“Pease” limitation) applies for taxpayers whose AGI exceeds an “applicable amount.” For 2014, the applicable amount is $305,050 for a married couple filing a joint return or a surviving spouse, $279,650 for a head of household, $254,200 for an unmarried individual, and $152,525 for a married individual filing a separate return. In addition, certain deductions may be claimed only if they exceed a percentage of AGI: 10% for medical expenses (7.5% for certain older taxpayers), 2% for miscellaneous itemized deductions, and 10% for casualty losses.
Medical Expenses: For 2014, medical expenses, including amounts paid as health insurance premiums, are deductible only to the extent that they exceed 10% of AGI (7.5% for taxpayers age 65 or older).
State Taxes: If you anticipate a state income tax liability for 2014 and plan to make an estimated payment most likely due in January, consider making the payment before the end of 2014. However, too high a payment could lead towards being subject to the AMT. Note that the election to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes expired at the end of 2013. However, there is the possibility that the deduction could be reinstated by Congress late in 2014.
Charitable Contributions: Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. You can use a credit card to charge donations in 2014 even though you will not pay the bill until 2015. A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year. Note, however, for claimed donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the organization sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received from the sale.
To avoid capital gains, you may want to consider giving appreciated property to charity.
Regarding charitable contributions of tangible property please remember the following rules: (1) no deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better; (2) the IRS may deny a deduction for any item with minimal monetary value; and (3) the restrictions in (1) and (2) do not apply to the contribution of any single clothing or household item for which a deduction of $500 or more is claimed if the taxpayer includes a qualified appraisal with his or her return.
Charitable contributions of money, regardless of the amount, will be denied a deduction, unless the donor maintains a cancelled check, bank record, or receipt from the donee organization showing the name of the donee organization, and the date and amount of the contribution.
A special provision gives taxpayers the ability to distribute tax-free to charity up to $100,000 from a traditional or Roth IRA maintained for an individual whose has reached age 701/2. Note that this provision expired at the end of 2013. However, there is the possibility that the provision could be reinstated by Congress late in 2014
