As year-end approaches, it can be beneficial for clients to connect with their tax professionals to get a better sense of their personal status and discuss potential strategies to minimize their tax bite. One specific area to consider is tax deductions. Historically, as a taxpayer’s income has increased, the benefit of claiming itemized deductions like mortgage interest on their tax return has been reduced. For example, in 2009, taxpayers saw the value of their itemized deductions begin to be reduced or “phased out” at an income level of $166,800. Due to a sunset provision in tax laws, these phaseouts for itemized deductions were eliminated in 2010 and, subsequently, extended for tax years 2011 and 2012 as a result of the tax deal signed into law in December 2010. With debate intensifying in Washington around alleviating the federal budget deficit, it’s unlikely that this preferential treatment of itemized deductions will survive past 2012. In fact, income level phaseouts on deductions are slated to return in 2013. Additionally, the Obama administration recently proposed limiting the value of tax deductions up to the 28% tax bracket.
With these factors in mind, taxpayers may benefit from accelerating deductions into 2011 and 2012 if feasible. Here are some examples:
- Consider prepaying a portion of mortgage interest into 2011 and 2012 to maximize use of this valuable tax deduction
- Clients considering a medical procedure that would result in significant out-of-pocket expenses may want to act before the end of 2012
- Prepay other deductible expenses such as property tax bills
- Accelerating charitable gifts
Other factors such as Alternative Minimum Tax (AMT) status may negatively impact certain strategies around claiming deductions, so it’s essential for clients to work closely with a qualified tax professional.