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Bunching itemized deductions
You always seem to have a lot of expenses
that you think could help cut your tax bill if you itemized.
But every year, they go to waste.
The problem: Your costs
regularly fall just short of the income thresholds they
must meet in some deduction categories.
Get around this tax-reduction roadblock
by bunching your expenses. It's too late to help cut
your 2008 tax bill, but by setting up this strategy
now, you can ensure that your "nearly" deductible
expenses become full-fledged tax breaks next filing
season.
Deduction
thresholds
The Internal Revenue Service allows some deductions
only after they exceed a minimum amount tied to your
adjusted gross income.
Medical expenses, for example,
are of no use until they total more than 7.5 percent of your adjusted
gross income. Similarly, miscellaneous deductions, such as unreimbursed
employee expenses, must surpass 2 percent.
If your adjusted gross income is $50,000, these limits
mean your medical
costs must be more than $3,750 and your miscellaneous
expenses have to exceed $1,000 before you get any Schedule
A deductions in these categories.
Pay attention to these costs throughout the
year. If you find you're getting close to the limits, think about
bunching as many deductible costs as you can into this tax year.
In the example above, if your medical costs
are at $3,500, get to your optometrist's office by Dec. 31 for that
second pair of reading glasses you've been meaning to buy. If your
out-of-pocket expenses for the eye exam and new glasses exceed $250,
you'll be able to claim the excess as a medical deduction on your
next tax return.
Many deduction
options
For miscellaneous expenses,
think about prepaying any
business magazine subscriptions
or professional dues early
to help you over the 2-percent
mark.
If you looked for a new job this
year, be sure to count your job-hunting
expenses here, too. Just remember that your job search has to
be in the same field in which you're already employed.
Do you have a hobby that nets you a bit of extra spending money throughout the year?
Any costs you had toward that hobby can be totaled up as a miscellaneous
expense. But you can't deduct more than you made on the hobby.
Write
off your taxes, too
And if this whole deduction
process is just too taxing
for you and you pay a professional
to figure it out, here's a
final itemizing gift from
the IRS: Fees paid to tax
preparers are also deductible
as a miscellaneous expense
that can further cut your
tax bill.
There are, however, a couple of downsides to this tax strategy.
Some items you might bunch into one tax year could cost you if you end up facing the alternative minimum tax. Some prepaid items, such as property and state income taxes, aren't deductible under AMT rules.
Also, bunching deductions usually helps you out only every other year. Generally, if you bunch your expenses into one year, you will find you don't have enough to be of use the following year. In those "off" tax years, your itemized expenses will just be smaller or, for some taxpayers, it might be more worthwhile to claim the standard deduction those years.
But getting the breaks only on alternate tax
filings is still much better than missing out on them every year. Find more tax-filing information and tips in Bankrate's Tax Guide.
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Updated: April 14, 2009 |
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