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Quick Action May Save You Hundreds of Dollars in Tax Savings


Prepaying Qualified Deductions in 2017 May Save You Hundreds of Dollars in Taxes!!

Now that the tax bill has passed both the house and the senate, it will soon be signed by the president and become the law of the land.  Now that we have information regarding the final version there are some things even middle-income taxpayers who itemize may consider doing before year end. 

The standard deductions have increased from $6,350 to $12,000 and $12,700 to $24,000 for single and joint filers, respectively.  By moving payments for medical bills, state and local income taxes, property taxes, and/or charitable contributions to 2017, you could save taxes.

For example, let’s assume you file jointly and currently have itemized deductions of $14,000 for 2017.  Because the standard deduction for 2017 is $12,700, you can use IRS Form Schedule A to increase your deductions by $1,300 ($14,000 – $12,700).  If you are in the 15% tax bracket, your federal tax savings is $195 ($1,300 x 15%).  Remember that in 2018 you will have a standard deduction of $24,000.  If your itemized deductions are under $24,000, it gives you no benefit to use Form Schedule A because it is to your advantage to take the standard deduction.  Let’s assume you had the ability to pay for charitable contributions and/or property taxes you would normally pay in 2018 in 2017.  In this example we will assume you prepaid $2,000 in charitable contributions and $1,500 in property taxes that you would have normally paid in 2018 by December 31, 2017.  By doing so, you would be able to save an additional $525 in federal income taxes in 2017.  Those same deductions would give you no benefit in 2018 because the standard deduction is being increased by $11,300.  Paying those amounts in 2018 would do nothing to decrease your tax liability.  By prepaying those charitable contributions and property taxes in 2017, you get a 15% return on your money (tax savings of $525).

So, if your itemized deductions for 2017 exceed the standard deduction but will not likely exceed the standard deduction of $24,000 in 2018, it could be to your advantage to prepay medical expenses, income and property taxes, and charitable contributions to enjoy a one-time tax savings that could mean hundreds of dollars of tax savings.

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