Time and tax deduction method changes
It's that time again, literally for most of the United States that switches from Standard to Daylight Saving Time (DST).
Whether you like the shift to DST, which provides more sunshine at the end the day. Or hate it since it forces you to head to work in the dark. Or are of the #LockTheClock persuasion like Florida Sen. Marco Rubio and mainly just hate the forced changes and want one time all year.
Even worse, we have to deal with DST during tax season.
Really? Losing an hour now? Most of us, regardless of whether we're taxpayers doing our own 1040s or tax professionals dealing with beaucoup returns, need every single minute to meet the tax deadlines.
Two types of tax deductions: This alternating time method does, however, bring up another tax comparison. The deduction methods used by taxpayers.
Just like there are the two distinct time-keeping systems, Standard and Daylight Saving, there are two distinct tax deduction methods, standard and itemized.
But unlike the two times, in the tax world, we get to make a choice every single filing season. We can keep or change our deduction method depending on which one saves us the most taxes.
And, not inconsequentially, based on which method saves us the most tax preparation time.
Standard deduction details: Time is one of the key reasons why most taxpayers have year after year opted to use the standard deduction method.
It's also much simpler.
When you itemize, you have to collect and keep receipts and records, then add them up (and often do more calculations) on Schedule A to arrive at the amount of expenses you can claim as deductions.
For the 2019 tax year, those are, as show on the excerpt from the 1040 below (you can click to get a larger image), $12,200 for single or married filing separately taxpayers; $18,350 for heads of households; and $24,400 for married couples filing a joint tax return.
These amounts are adjusted annually for inflation. They are bumped up a bit for the 2020 tax year. But since we're filing 2019 returns right now, the standard deduction amounts for that tax year earn this week's By the Numbers honors.
Older and visually impaired filers used to have to do a bit more figuring, but now that's covered in the new 1040-SR, which lists the increased standard amounts right on that form, again shown below (again, click image for bigger picture).
Itemized extra work: As noted earlier, if you itemize your expenses, it's more work.
Not only do you have to know what is an allowable itemized expense, you and to keep track of all them that you can claim.
Then you have to file Schedule A, which in some cases, requires even more figuring. Allowable medical expenses are the best example here.
There are a lot of different medical costs you can use in this first section of Schedule A. So you want to have that documentation on hand. This is where good, year-round record keeping helps. It's must easier at filing time to pull out that material than to track it down or try to recreate it.
But while there are many allowable medical costs, not every dollar counts toward your itemized doctor and dental claims. You can one claim the total of your medical costs that exceed 7.5 percent of your adjusted gross income (AGI).
For some folks, that's worth the trouble. But it's a pain, pun intended, when you enter all your medical costs, run the AGI percentage and find you get a minimal or no write-off at all.
Bunching deduction strategy: The good think about the two tax deduction options is that, as previously noted, you get to decide which one you'll use.
You'll always want select the one that gives you the larger deduction.
If you find as a tax year goes on that you'll be close to having more itemized expenses than your standard deduction amount, consider bunching those costs. This is simply pulling or pushing deductible expenses into one year where you can make the most of them.
Sticking with our focus on medical expanse, have your children's orthodontia work and get extra pairs of prescription glasses for the whole family in one tax year. These costs could help you clear the 7.5 percent AGI itemized hurdle.
It works with most of the Schedule A claims. As I noted in a recent #TaxBuzzChat with the Tax Twitterverse on tax minimization strategies, I've been shifting the calendar payment of state and local taxes (SALT) since the Tax Cuts and Jobs Act (TCJA) set a $10,000 limit on their deductibility.
A1. we've itemized over the last few years even under TCJA. I've been splitting SALT payments, paying in one year just enough to claim; pushing rest into next tax year in case limit is increased or eliminated #taxdreams #TaxBuzzChat— Kay Bell (@taxtweet) March 4, 2020
Such annual deduction tweaks also work if you're philanthropic. You can double up your gifts to your favorite charity in that same tax year you'll be claiming all those doctors' costs.
Alternating deduction methods: Bunching, however, will mean that the next tax year you'll probably not come anywhere near being able to itemize.
Not to worry.
Unlike our two time-keeping methods, we taxpayers get a choice every filing season as to which deduction method we want to use.
You can itemize for five years in a row and then, bam, you have lots of medical bills so you itemize for that year.
Or, if you employ bunching, you'll more likely alternate years of itemizing and claiming the standard amount.
Agree! It's even more powerful now that the Std Ded is higher. Can really make a big impact!! #TaxBuzzChat— Jina Etienne CPA CGMA (@MissTaxCat) March 4, 2020
As Jina @MissTaxCat Etienne and I discussed, you can itemize this year, then next filing season claim the standard deduction amount. Then go back the following year to filling out a Schedule A. Rinse, deduct, repeat.
Also as Jina points out, the TCJA greatly increased the standard deduction amount so there are even fewer filers claiming itemized deductions.
But the great thing about the deduction options is that you get to make the choice. So don't think just because you used one method for many years that you're locked into it. Look at your tax situation and your expenses.
If you find it's better this year to itemize rather than take the standard deduction, then do that, even if it takes more time to do your taxes. The larger deduction payoff should make up for that time loss.
And if going with the standard claim is better, then hurray! You get a better tax result for less work.
The point is, check them both out and decide.
Now, since I have no choice, I'm off to make sure I didn't miss resetting any clocks last night.
I'm pretty sure I got them all, but then I think that every year, both when we spring ahead or fall back an hour. (Planning notice: Standard Time returns this year on Nov. 1.)
And twice a year, weeks after the changes, I'll find a timepiece still on the other time.
You also might find these items of interest:
- 2 tax deductions you can claim as late as April 15
- 22 tax deductions, no itemizing required, on Schedule 1
- Thumbing through the IRS' medical deduction (or not) list