HOW TO GET THE MOST OUT OF ITEMIZING

A little planning can help maximize your deductions — and put money back in your pocket.

Itemizing is an incredibly easy concept to understand, but the strategies behind it can be complex and myriad. The rule for when to itemize is simple — you do it if the total of your itemized deductions is greater than your standard deduction.

Your tax is based on your “taxable income.” That’s your total income after you’ve subtracted above-the-line deductions like your Individual Retirement Account or other qualified retirement-plan contributions, moving expenses or alimony payments, plus your personal exemption and either your standard deduction or your itemized deductions. Your itemized deductions are sometimes referred to as “below-the-line” deductions. (Your “adjusted gross income” is “the line.”) Clearly, the more you can deduct, the less in tax you have to pay.

Here are the standard deductions and exemptions that apply:

Certain taxpayers must itemize, even if their deductions are less than the standard deduction. You must itemize your deductions if:

There are five main categories of itemized expenses that you can deduct on your taxes:

The key, then, is to maximize the value of your itemized deductions. Here’s where planning can put dollars in your pocket.

Dealing With the Floors

Some itemized deductions — including medical expenses or miscellaneous deductions such as investment expenses, safe deposit fees, professional education, employee job-hunting expenses and tax-preparation fees — are not allowed until they exceed a certain “floor” amount.

For example, no medical expenses are allowed as itemized deductions except to the extent that they exceed 7.5% of your adjusted gross income. That means if you have an adjusted gross income of $100,000, the first $7,500 of your medical expenses don’t count.

But sometimes, elective medical expenses can be accelerated or even deferred. For example, orthodontia payments for you or your dependents can often be extended — but they always can be accelerated. These expenses are deducted in the year they are paid, not necessarily in the year the service is rendered.

If you can already pass the 7.5% test for allowable medical expenses, or these expenses would put you over the minimum hurdle, then you should 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.

Alternatively, 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 December 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

Certain 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 payment a day earlier when it's still December , you have accelerated a full month’s interest deduction into . In the 25% bracket for on a $1,000 interest payment, that saves you an immediate $250 on April 15, . By doing that each year, you have created an interest-free loan of that $270 in perpetuity or at least until the loan is paid off. (Note: the 25% rate is down from 27% in 2002.)

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 December 31, payment will be for the use of the money during December .

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. For example, I am billed for the fourth quarter of my real-estate taxes on February 1 of the following year. But I actually make my payment on December 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, mosque or synagogue is sent on December 31, or January 1, makes little difference to the charity receiving the money. However, in the 25% bracket for , 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.