Delaying an eligible tax deduction until the following tax year, while unusual, could be a reasonable tax strategy in a number of situations. An individual or business wanting to delay a deduction is likely seeking to reduce tax liability in a future year at the expense of incurring a higher tax liability in the present year. While simply accounting for a deduction on next year's tax return instead of this year's tax return is generally not allowed, there are a number of ways a taxpayer can alter her underlying activity such that a deduction is realized at a later date.
Deductions Must be Taken When Realized
The Internal Revenue Service has particular rules regarding when each potential tax deduction can be taken on a federal tax return, and these rules generally apply to state returns, as well. For example, if an individual uses a home office in June of a particular year, the corresponding tax deduction applies to that year's returns. Similarly, mortgage interest is deductible in the year when it is paid. A taxpayer will, in most cases, not be allowed to postpone a deduction into a future year, even if doing so means a higher tax payment and more government revenue.
Some Deductible Activities Can Be Postponed
While deductions can't be delayed simply by accounting for them in a future year, taxpayers are free to make personal and business decisions that may impact when a particular deduction is realized. For example, someone contemplating making a contribution to a charitable cause in November may instead decide to make that contribution three months later, effectively delaying the resulting tax deduction by an entire year. A business utilizing the cash accounting method can similarly delay legitimate business deductions and expenses by postponing certain payments: paying a vendor in January for December services will effectively shift income into the earlier tax year.
Delaying Deductions Can Reduce Tax Liability
Typically, individuals and businesses seek to maximize present year deductions, rather than delay them: doing so improves current cash flow and allows money to be kept from the government as long as possible. There are situations in which it might make sense to delay a tax deduction. For example, an individual might expect to take the standard deduction in the current year but itemize deductions in the following year. In that case, any current deductions would essentially be worthless as the individual wouldn't be itemizing them in any event. Similarly, an individual might expect to be in a much higher tax bracket in future years, in which case postponing deductions would provide far more value.
As with any tax strategy, potential pitfalls exist for those delaying deductions until a future year. First, such planning could lead to mistakes and, thus, IRS scrutiny: rules governing when a medical deduction is realized, or what happens when a political contribution check is postdated, can be complex or mishandled. It's also possible for a taxpayer who properly follows all such rules to simply make a tax planning mistake: for example, an unexpected business setback may reduce a future year's tax bracket, which could in turn render a postponed tax deduction far less valuable.
Wally Foster is a business attorney and entrepreneur who has been writing professionally since 2003. He has written for magazines including "Consumers Digest" and has contributed to several books published by Hundreds of Heads. Foster holds a Bachelor of Arts in English from Williams College and a law degree from Harvard.