Many tax deductions and credits are figured based on how much you paid during the calendar year. By prepaying certain expenses, you can accelerate your deductions for those expenses into the current year, leading to a smaller tax bill. However, remember that if you accelerate an expense into the current year, you won't be able to use it the following year.
Higher Education Expenses
When figuring your tax breaks for higher education expenses, you can include tuition that you pay in the current year for classes beginning in the first three months of the following year. For example, if you're starting classes in January 2013, you can pay your tuition in December 2012 and include those costs in your 2012 taxes. However, you can't double count the costs by then including them on your taxes for 2013. In addition, note the maximum expenses for the credit you're claiming: If you've already reached the maximum, incurring additional expenses won't help you. For example, in 2012, you get the maximum American opportunity credit with just $4,000 of expenses. If you've already spent $4,000 during the year, prepaying won't help you.
Medical expenses are deductible in the year that you pay them, rather than the year that you receive the services, so prepaying them could get you a bigger deduction. In addition, medical expenses are subject to an adjusted gross income threshold, which means that only the portion of the expenses in excess of the threshold are actually deductible. Therefore, lumping your costs in the same year makes it more likely you will exceed that threshold. For example, say the threshold is 10 percent. If your adjusted gross income is $50,000 in both year 1 and year 2, only the expenses that exceed $5,000 in either year are deductible. So, if you have $5,000 in both years, you don't get any deduction. But, if you have $10,000 in year 1, you get a $5,000 deduction.
State Income Taxes
The deduction for state and local income taxes is based not on how much you owe come tax day, but how much you paid during the year in income tax withholding, estimated payments and your tax refund or liability paid with your income tax return during the year. For example, when figuring your 2012 state and local taxes, it includes the amount you paid -- or the refund you received -- with your 2011 tax return. If you expect to owe money on your state tax return, making an estimated tax payment before the end of the year increases your state and local income tax deduction. However, the more you prepay, the less you will be able to deduct the following year.
Charitable donations are also deductible in the year that you make them. Lumping your donations into on tax year rather than making smaller donations over several years. For example, say your standard deduction is $6,000 and you have $2,000 of other itemized deductions. If you plan to donate $4,000 in each of the next two years, you wouldn't save anything on your taxes because your itemized deductions would be the same as your standard deduction. However, if you accelerate that $8,000 of charitable contributions into the current year, you can itemize in the current year and then claim the standard deduction in future years.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."