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Itemized vs. Standard Deductions

Choosing between itemizing and taking the standard deduction is normally one of the easier decisions a taxpayer has to make.  For example, if the sum of your itemized deductions exceeds the standard deduction, you will want to itemize deductions, and conversely take the standard deduction if your itemized deductions are less than the standard deduction.  Remember that itemized deductions include (but are not limited to): medical and dental expenses not paid or reimbursed by others (total must exceed 10% of your AGI or 7.5% of your AGI if you are over 65 years old), state and local taxes, real estate taxes, contributions and expenses incurred while doing volunteer work, and interest on a home or second home.  The IRS recognizes expenses in the year you pay them, so for example if you receive a doctor bill in 2015 but do not pay it until 2016, the expense can only be deducted in 2016.

Alternating Between the Itemized and Standard Deductions

One advantage that taxpayers have is that they can alternate between itemizing and taking the standard deductions from year to year, choosing whichever is most beneficial.  Alternating between the itemized and standard deductions is an effective way to reduce your tax liability for taxpayers who are not able to itemize, but have total itemized deductions that are close to the standard deduction and taxpayers who have itemized deductions that barely exceed the standard deduction.

For example, imagine that every year the sum of your itemized deductions are just shy of the standard deduction amount.  In order to increase your itemized deductions and be able to take a deduction for all the interest and taxes you have paid throughout 2016, prepay some of your 2017 deductible expenses, such as real estate taxes, in 2016.  This will allow you to itemize your deductions this year and receive the benefits of your deductible expenses.  During the following year (2017) you will then take the standard deduction, but will be able to repeat this process in 2018 and itemize again, giving yourself additional deductions that otherwise would have been lost.

"Bunching" Expenses

Once you have determined which years you are going to try and prepay expenses, allowing you to itemize during that year, an effort should be made to "bunch" your deductible expenses in the year you will be itemizing.  A great example of how to do this would be if you make an annual contribution to one of your favorite charities.  Many individuals contribute to charitable organizations around the holiday season.  For instance, say you contribute $1,500 every December 31st to the Salvation Army.  If you have determined that you will take the standard deduction in 2015, but would like to itemize in 2016, make your $1,500 contribution that you normally would have made in 2015 on January 1, 2016 (or after), and your 2016 contribution on or before December 31, 2016 for a total contribution of $3,000 that you can use as an itemized deduction in 2016 (the year you are itemizing).

Being able to itemize every other year and "bunching" your deductions will allow you to take deductions above and beyond the standard deduction that you otherwise would have lost, saving you money in the long run.  For other information or questions you may have, please call us or visit our website at http://www.mbcocpa.com.

 




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At Mosford, Barthel & Co., PLC., we've been serving the accounting needs of Monticello, MN and the surrounding areas for years. If you need help managing any aspect of your home or business's finances, we want to hear from you.

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Mosford, Barthel & Co., PLC.

305 Cedar Street, Suite 201,
Monticello, MN 55362
T:  (763)295-4800
F: (763)295-4804
E:  amoll@mbcocpa.com

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