1. Bundle Medical Expenses To Maximize Itemized Tax Deductions
When you incur medical expenses that are not covered by health insurance, you are only allowed to deduct them from your taxable income to the extent that they exceed 7.5% of your adjusted gross income.
Let’s say you make $50,000 a year. 7.5% of $50,000 is $3,750. If you have out-of-pocket medical expenses of $4,000, only $250; the amount that exceeds $3,750, would be eligible as an itemized tax deduction.
To maximize the use of this tax deduction, you need to do three things:
- Each year calculate an estimate of what 7.5% of your adjusted gross income will be.
- Keep a running total of your out-of-pocket medical expenses each year.
- If you have a year where you are nearing your threshold, determine if there are expenses you can bundle into the current calendar year.
2. Pre-Pay State Income Taxes To Maximize Itemized Tax Deductions
State income taxes paid are an itemized tax deduction on your federal return. Many people can benefit by paying their state income taxes before year end in order to maximize their deductions for federal taxes.
Be careful, as this strategy can possibly throw you into AMT (alternative minimum tax). If you plan on prepaying a substantial amount of state tax, consult with a tax advisor to make sure this strategy will work for you.
3. Bundle Investment and Tax Prep Related Expenses To Maximize Itemized Tax Deductions
Expenses such as tax preparation fees, safety deposit box fees, and investment fees are deductible only to the extent that they exceed 2% of your adjusted gross income.
Let’s say you make $50,000 a year. 2% of $50,000 is $1,000. If you have out-of-pocket investment and tax preparation related expenses of $1,500, only $500; the amount that exceeds $1,000, would be eligible to be listed as an itemized tax deduction.
If it would allow you to exceed the 2% threshold, and if you work with advisors you trust, you may consider prepaying for tax preparation and investment advisory/financial planning services. In this way two years of expenses can be bundled into a single calendar year.
As with all tax related advice, seek professional assistance, or do additional research on the IRS site, to determine if a strategy will work for you.
For additional information see a List of Itemized Deductions.