When it comes to reducing your tax liability, timing truly is everything. By strategically planning when you incur or pay deductible expenses, you can potentially maximize the deductions available to you and increase your tax refund or reduce the amount you owe. This tax-saving tactic is especially useful for individuals who itemize deductions, self-employed taxpayers, and small business owners. Understanding the rules of deduction timing and how to shift income or expenses between tax years can yield significant benefits.
Why Timing Matters in Tax Planning
Tax returns are filed on an annual basis, meaning the Internal Revenue Service (IRS) only considers income and deductions within a specific calendar year (unless you’re using a fiscal year for a business). By deciding when to incur or pay certain expenses—such as medical costs, charitable contributions, or business expenditures—you can influence the size of your deductions in a given tax year.
This concept is commonly known as “bunching” deductions or expense shifting. It’s particularly helpful when your itemized deductions in one year might fall just short of the standard deduction threshold, but could exceed it with some strategic adjustments.
Cash Basis vs. Accrual Basis Taxpayers
Before diving into timing strategies, it’s crucial to understand how your accounting method affects your tax obligations:
- Cash basis taxpayers (most individuals and small businesses): Report income when received and claim deductions when expenses are paid.
- Accrual basis taxpayers (some businesses): Report income when earned and claim deductions when expenses are incurred, regardless of payment date.
This blog focuses primarily on strategies for cash basis taxpayers, as they have more flexibility with timing.
Top Expenses You Can Time Strategically
There are several types of deductions that you can legally accelerate or delay depending on your tax situation. These include:
- Medical expenses: If your qualified medical expenses are nearing 7.5% of your AGI threshold, consider scheduling additional treatments before year-end.
- Charitable contributions: Make donations before December 31 to deduct them in the current tax year.
- State and local taxes (SALT): Prepay property taxes or estimated state income taxes if you’re below the $10,000 SALT cap.
- Mortgage interest: Make your January mortgage payment in December to capture an extra month’s worth of deductible interest.
- Business expenses: Buy equipment, supplies, or prepay certain services to increase your current-year deductions (if eligible).
Bunching Deductions: How It Works
Bunching deductions refers to the strategy of concentrating deductible expenses into one tax year so they exceed the standard deduction threshold, allowing you to itemize and maximize tax savings.
For example, if you typically make $5,000 in charitable contributions annually and have $7,000 in other itemizable expenses, you’re just under the 2025 standard deduction of $13,850 (single) or $27,700 (married filing jointly). If you bunch two years’ worth of charitable contributions into one year (i.e., contribute $10,000), your total itemized deductions could exceed the threshold, yielding a tax benefit that would otherwise be lost.
Income Timing to Complement Deductions
In addition to timing expenses, you may also benefit from deferring or accelerating income to manage your tax bracket. For example:
- Delay year-end bonuses or freelance income to the next year if it will push you into a higher bracket.
- Accelerate income into the current year if you expect to earn less or face higher tax rates in the future.
Coordinating income and deductions together can create powerful tax planning opportunities.
Special Considerations for Self-Employed Individuals
If you’re self-employed or run a small business, you have even more control over timing deductions. Consider the following:
- Prepay rent, utilities, or insurance if they cover services for 12 months or less and do not extend past the next tax year.
- Buy office supplies, equipment, or software before year-end and deduct them under Section 179 or bonus depreciation (subject to limits).
- Defer billing clients until January if receiving payment now would push you into a higher bracket.
Always consult a tax professional to ensure these timing tactics are applied correctly and in accordance with IRS rules.
Watch Out for the Alternative Minimum Tax (AMT)
If you’re in a higher income bracket, be mindful that accelerating certain deductions (such as state taxes) could trigger the AMT, which disallows many itemized deductions. Running the numbers in advance can help avoid this unintended consequence.
Document Everything
Regardless of when you incur or pay deductible expenses, thorough recordkeeping is essential. Keep documentation such as receipts, payment confirmations, and acknowledgment letters for charitable donations. In the event of an IRS audit, proper substantiation is critical.
Year-End Checklist for Maximizing Deductions
- Review estimated income and projected deductions
- Evaluate whether to accelerate or delay major deductible expenses
- Compare standard vs. itemized deductions
- Prepay expenses that qualify for current-year deductions
- Consult with a tax advisor to finalize timing decisions
Conclusion
Timing expenses across tax years is a legitimate and effective way to manage your tax liability. By taking advantage of allowable deduction timing strategies, you can potentially move from taking the standard deduction to itemizing, or even shift income between brackets to reduce your effective tax rate. Especially as year-end approaches, these timing tactics can be the key to maximizing deductions and securing the best possible refund. Whether you’re a salaried employee, self-employed, or a small business owner, proactive tax planning pays off—literally.
