Timing Itemized Deductions

Most people have the big three deductions: mortgage interest, real estate taxes and state income tax. Added together, they come to about $16,000. You can subtract this off your total income. However, a person with none of these expenses is allowed to subtract off $11,000 from their income. That means that you have paid out $16,000, but only received $5,000 in real savings.

By controlling the timing of the big three deductions, you can take advantage of that discrepancy. Double up your deductions this year and you have $32,000. Next year, have zero. IRS will give you a “free” deduction of $11,000. That means you now have $43,000 in deductions for the two years, not $32,000. But you have not paid out any more money than you otherwise would.

The ideal situation is to have no mortgage interest. Controlling the other two is easy. You can’t control mortgage interest. People with mortgages can still benefit, but not as much.

Not everyone is in the right situation or has the correct amounts of income and deductions to make this work. For those that do, it can mean thousands of dollars in tax savings every other year.

Click here for a worksheet that shows an example of these tax savings.