Year-end Timing Crucial for Deductions!
It's the end of the year; you are scrambling for last-second deductions to reduce your 2015 tax bill. Your thoughts turn to those of charitable donations, medical bills, state and local taxes, and other deductions you may need. Maybe even to purchasing business equipment or other assets, if you own a business.
To save time (and not miss the next holiday party), you decide that you can just wait until after everything settles down post-holiday to write the checks because after all, as long as you just write "December 31" on the checks, you get to claim the deductions for 2015, right?
Oops! "Not so fast" (with apologies to Lee Korso)!!
Yes, it IS important that the checks you write are dated in 2015 to get the deductions, since the IRS says post-dating checks to 2016 to prevent them from being cashed will cost you the deductions. But equally important is when you mail them.
In order for the deductions to stand for this year, you will need to have those payments in the mail in plenty of time for them to be postmarked by the time we're singing "Auld Lang Syne" (i.e., midnight on December 31st).
As long as you do that, the tax law could care less that the checks reach their intended targets in 2016 and not in 2015.
The rules are similar when you use credit cards issued by third parties such as VISA and MasterCard. You are entitled to the deductions as soon as you authorize the charges, even if you aren't billed or pay the bill until next year.
The same isn't trust for cards or charge accounts issued by stores or suppliers who bill you directly. You get no deduction until you actually pay those bills, which means the write-offs are shifted from 2015 to 2016. You will want to avoid that surprise!
One widely used strategy to increase your itemized deductions for this tax year is to pay property taxes and the fourth-quarter installment of 2015 estimated state and local income taxes by the time the ball drops, instead of waiting until they become due in 2016.
This tactic especially benefits someone who expects to be in a lower federal bracket in the next year since the deductions are worth more in the current year.
Prepaying these taxes also benefits someone who might be subject to the alternative minimum tax (AMT) next year. Certain deductions don't apply to the calculation of the AMT, so in any year that the AMT applies, no tax benefit is received for those deductions.
State and local income and property taxes are among the items that aren't deductible for AMT.
Word of caution here though; if you will be subject to AMT in 2015, prepaying these taxes will not benefit you this year, and may be better off paid in 2016.
Also, don't think you can game the system by paying in an overly large amount of state or local income taxes. The IRS has ruled that a payment of estimated state income taxes in December 2015 cannot be deducted for 2015 where you don't reasonably expect to owe any additional state tax liability at the time you submit the payment and you end up receiving a refund of this overpayment next year.
You can certainly save some money from Uncle Sam by paying attention to the timing of payments that may generate deductions. Just be aware of the finer points of the requirements for the deductions to stick.
Finally, let me say "Merry Christmas and Happy New Year" to you all! May many blessings come your way and all your wishes come true!!
