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Fun with Schedule A

Last week, in “More Roth Magic”, I discussed how for people on the edge of a tax bracket, there are some moves that one can make to optimize their wealth (read that – minimize their taxes over time.) Now, as promised, let’s look at schedule A.

From Fairmark, we can see that in 2008, the standard deduction for a married couple filing jointly is $10,900. Let’s think about this. A couple earning $60,000 might live in a house worth $200K, and be paying on a mortgage balance of $150K or at 6%, about $9,000 per year interest. Maybe another $2000 or so goes to property tax. At tax time, their total itemized deductions may just exceed the standard deduction, if that. Now, with a bit of planning, they may be able to use the system to work toward their advantage. In year one, right at the end of the year, make one extra mortgage payment. Not a principle payment, but the next month’s payment. This way the bank will credit the account with having paid that interest in advance. Similarly, go to the tax assessor’s office and pay at least half next year’s property tax bill in advance. They should be happy to take your money and credit your account. Are you generous to your house of worship or other charities? Make your annual donations in January of this year and then again in December of the same year. Now you’ve stacked up your Schedule A deductions to their maximum. Next year, just 11 mortgage payments, no donations, maybe half a year’s property taxes, and you take the standard deduction. Just one way to beat the system, a bit. Let me know what you think.

JOE


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