Near the end of the year, it is always good idea to examine whether accelerating or deferring income or deductions to the next taxable year can lower a client’s total tax over the two-year period. With the ever-increasing number of deductions and tax credits that are subject to income phaseouts, tax planning is more complicated than ever. First, let’s consider the basic standard deduction and analyze whether it may be better for some taxpayers to accelerate or postpone some deductions by paying them in December 2014 or January 2015. For example, assume that Vanessa, a single taxpayer, generally incurs around $6,000 of itemized deductions each year. Since the standard deductions in 2014 and 2015 for single taxpayers are $6,200 and $6,300, respectively, the taxpayer will claim the standard deductions in 2014 and 2015 rather than itemize her deductions. But wait! What if it were possible to alter the timing of some of the deductions. Assume that her $6,000 of itemized deductions included in part (1) $1,000 of charitable deductions to her church which she contributes every year, (2) $1,200 of real estate taxes on her home which was paid on January 11, 2014, and (3) $3,600 of mortgage interest on her home. Assume that she just received next year’s real estate tax bill of $1,300 that is due by January 15, 2015, and the interest portion of the mortgage payment due on January 1, 2015, is $300. By accelerating her 2015 charitable deductions to 2014 and by paying her January real estate tax bill and January mortgage payment in December 2014, she can itemize her deductions in 2014 and claim the standard deduction in 2015. This strategy will result in 2014 itemized deductions of $8,600 ($6,000 + $1,000 + $1,300 + $300) rather than a standard deduction of $6,200 for a net reduction in taxable income of $2,400 ($8,600 - $6,200). In 2015, her itemized deductions will be considerably less so she will take the 2015 standard deduction of $6,300. So by accelerating some of her itemized deductions normally incurred in the odd-numbered years to the even-numbered years, her total tax deductions over the two taxable years have increased. On our website, we have posted a table of key 2014 amounts and limitations. These include the standard deduction, exemption deductions, and the AGI or Modified AGI (MAGI) amounts where certain tax deductions and tax credits begin to be phased out or are eliminated. The latter includes phaseout amounts reducing: (1) exemption deductions; (2) itemized deductions; (3) child tax credits; (4) American Opportunity tax credits, (5) IRA deductions; and, (6) several more. Please CLICK HERE for the complete table. If some of your clients are affected by one or more of these phaseout limitations, they may be able to increase their 2014 tax deductions or tax credits by either deferring income to 2015 or accelerating 2015 above-the line deductions to 2014 (the phaseouts are based on AGI rather than taxable income so accelerating itemized deductions does not affect the AGI limitations). For example, assume a single taxpayer estimates that her 2014 AGI is expected to be $80,100. She has one child who qualifies for a child tax credit. The phaseout of the child tax credit for a single taxpayer begins at an AGI of $75,000. Assume that she has a stock that if sold would result in a capital loss of $2,400. This action will result in two tax savings if she realizes the capital loss in 2014 – (1) increasing her child credit (by $150 since less of the credit is phased out), and (2) increasing her tax deductions (by $2,400). Note: Deferring income to the next year or accelerating deductions to the current year is likely to have a negative impact on next year’s tax liability. So, as in the first example above where itemized deductions were accelerated from 2015 to 2014, the tax costs and benefits of both years need to be estimated to determine the optimal tax strategy.