PricewaterhouseCoopers 2008 Guide to Tax and Financial Planning

Chapter 10. Accelerating Deductions

Accelerating deductions into an earlier year gives taxpayers their tax benefits sooner. If tax rates are higher in the earlier year, the deduction is more valuable because it offsets income that is taxed at a higher rate. That was the case for deductions that were accelerated from 2003 into 2002. However, because tax rates are not expected to change from 2007 to 2008 (other than certain indexing for inflation), accelerating deductions at the end of 2007 usually will only generate earlier—not larger—tax savings. Nonetheless, those who expect to be in a lower tax bracket in 2008 for other reasons may get both tax benefits from accelerating their deductions into 2007.

Your goal is to use deductions to their full potential, keeping in mind that itemized deductions provide a tax benefit only if their total is more than the standard deduction amount.

Example

The standard deduction for a married couple filing a joint return for 2007 is $10,700. If you accelerate deductions from 2008 into 2007 and it turns out that your 2007 itemized deductions total less than $10,700, your effort will not have increased the amount of deductions you can claim in 2007. In addition, you will have lost the opportunity to take that deduction in 2008 when it might have reduced your taxes if your total itemized deductions exceed the standard deduction for 2008.

Equally important is something everyone knows but few put into practice: keep track of your deductions as they occur, ...