Get the most out of itemizing on taxes

If you can already pass the 7.5% test for allowable expenses, or these expenses would put you over the minimum hurdle, then consider accelerating them. If you lack the cash, consider charging the expenses. On credit card charges, you are allowed the deduction in the year of the charge, not in the year that the charge is paid off.

Don't automatically accelerate if it puts you over the 7.5% floor. Remember, your total itemized deductions must exceed your standard deduction before you get any real additional benefit from any of them. Allowable medical expenses are just one component of the package.

If you don't exceed the 7.5% floor or your total itemized deductions don't exceed your standard deduction this year, you should consider deferring your payments or any elective medical procedures. You get the use of the money -- and any investment returns. In any case, you may be able to use the deductions in the subsequent year when you revisit the itemization question.

Miscellaneous itemized expenses are also deductible only after they exceed a minimum floor. In this case, it's 2% of your adjusted gross income. So, with an adjusted gross income of $100,000, your first $2,000 of miscellaneous itemized deductions won't count.

But here again, many of these deductions can be either accelerated or deferred. Miscellaneous itemized deductions such as those mentioned above often can be paid in the year of your choice. Many of my clients send my tax-preparation fees to me on Dec. 31 in order to get the deduction in the year the check was mailed. I don't get the income until I receive the check -- in the new year.

The rule here is the same as with medical expenses. First, qualify the expenses to be included in the deductible pot. Then, only if you expect to itemize, accelerate. If not, defer.

Interest and tax payments

Some interest and tax payments can be handled in the same way.

Let's look at the interest you are paying. Your January payment on your mortgage includes the interest you accrued for December of the previous year. By making your January 2009 payment on Dec. 31, 2008, you have accelerated a full month's interest deduction into 2008. (Ditto if you make your January 2010 payment on Dec. 31, 2009.)

In the 25% bracket for 2008 on a $1,000 interest payment, that saves you an immediate $250 on April 15, 2009. By doing that each year, you have created an interest-free loan of that $250 in perpetuity or at least until the loan is paid off.

Unfortunately, you can't prepay two or three months in advance because the interest deduction must relate to the year the money was used. But your Dec. 31, 2008, payment will be for the use of the money during December 2008.

You can accelerate some tax payments as well. If you don't pay your real-estate tax in your mortgage, you have the opportunity to accelerate your real-estate tax payments.

I am billed for the fourth quarter of my real-estate taxes on Feb. 1 of the following year. But I actually make my payment on Dec. 31 of the previous year. The technique is the same with estimated state income tax payments. I make my estimated state income tax payment, due in January, in December.

Any voluntary expenditure can be accelerated or deferred. Your gifts to charity are the best example. Whether your $1,000 pledge to your church or synagogue is sent on Dec. 31, 2008, or Jan. 1, 2009 (or Dec. 31, 2009, or Jan. 1, 2010), makes little difference to the charity receiving the money. However, in the 25% bracket for 2008, it can make a $250 difference to your tax bill -- but again, only if your total itemized deductions exceed your standard deduction.

If I can qualify for itemizing my taxes, I want to accelerate my tax savings. A dollar not paid today is worth a lot more than a dollar not paid in the future.

Updated March 3, 2009

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