Year-End Planning for Itemized Deductions

November 7, 2016

For 2016, the standard deduction is $6,300 for single taxpayers (and for married persons filing separately) and $12,600 for married couples filing jointly. For heads of household, the standard deduction is $9,300. People who have reached age 65 by year-end can take an additional standard deduction of $1,250, if married, or $1,550, if not married. Taxpayers who are blind also get this additional standard deduction.

Example 1: Stan and Kate Thompson are both 68 years old; they file a joint tax return. Their standard deduction for 2016 is the basic $12,600 for couples filing jointly plus $1,250 for Stan and $1,250 for Kate, for a total of $15,100. (If one of them was blind, that amount would increase by $1,250, to $16,350.)

These standard deductions are claimed by most taxpayers. However, you also have the opportunity to itemize deductions on Schedule A of Form 1040 when you file your income tax return. If the total of your itemized deductions exceeds your standard deduction, you can save tax by itemizing.

Example 2: In example 1, the Thompsons had a standard deduction of $15,100. If the amounts they could deduct on Schedule A, for medical and dental expenses; taxes paid; interest paid; charitable gifts; casualty and theft losses; job expenses; and miscellaneous deductions total $15,000, this couple will be better off by not itemizing and taking the standard deduction. On the other hand, if that total is $16,000, the Thompsons should file Schedule A and increase their tax deduction by $900: $16,000 instead of $15,100.

For effective year-end planning, estimate your potential itemized deductions for 2016 well in advance of December 31. If you see you will benefit by itemizing, you may decide to accelerate certain payments into 2016. In many cases, the extra payments will be fully deductible. Conversely, if you are far below the standard deduction amounts, you won’t get any tax benefit from, for example, writing a modest check to charity. You may decide to postpone the donation until sometime in 2017, when you might be itemizing and get a tax benefit from your contribution.

Our office can meet with you before year-end to go over your records and indicate whether you should make tax saving payments by year-end, in the expectation of itemizing deductions.