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.
  
  

Potential Pitfalls

• 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.