Bunching Itemized Deductions

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With the year about to end, it is the perfect time for the ever-nagging question to occur to most taxpayers. Is there some way that I could land myself in a better position during the coming tax season? Since tax laws are subject to change, like any other laws, the answer is different for each year but bunching itemized deductions can save a hefty amount of tax.

However, it became complex last year when a tax law drastically changed things. A doubling of deductions was okayed, i.e., $24,000 for married and joint filers while half of that for individuals.

But a cap now existed on the number of total deductions that we can take in State and Local Tax, i.e., at $10,000. Before, the amount was unlimited. It means those of us not reading this article may not know the right way of itemizing deductions! This is where bunching comes in.

What Does Bunching Mean?

Bunching means paying two years of deductible expenses in one tax year. Any expense that you can subtract from your gross income – and thus reduce what you pay in taxes – is called an itemized deduction. As your Itemized Deductions for the next year decrease significantly, the total amount of your deductions increases in this one!

Gettting paid cash? Learn how to file and report your taxes.

Therefore, you take the standard deduction in tax years with low itemized expenses. But you can go with Itemized Deductions to help ease your way through a year when you expect larger ones. You can maximize the benefit of your tax return and save money!

Before jumping into it, we’d recommend calculating your taxes and expenses for two years at a time.

Which Deductions can be Bunched?

Deductions may vary for everyone, but they can only be considered bunchable, if you can prepay on them.

We have made matters simpler for you and included a few examples that work well with Bunching:

Charitable Contributions

Since you control both how much you give and when you do it, charitable contributions are the easiest to manage. Say, you want to contribute to a church, how can you make it bunchable?

Instead of donating at the end of the year, postpone until January, and then do it. You will successfully lower the amount of Itemized Deductions for the current tax year. This increases the chances of making the standard deduction more beneficial to you.

Next year, return to donating in December and double up on your charitable contributions. Thus, it could be more beneficial to itemize your deductions.

Medical Expenses

Aside from emergency medical care, there are many elective medical procedures. You may be considering getting those. Or, you may want to replace an older version of a home medical equipment. Why not bunch them?

Just remember the deduction of only medical expenses that exceed 10 percent of your adjusted gross income is possible. Deduct expenses that you couldn’t have paid off with bunching!

Property Taxes

You can deduct the property taxes only after they have been assessed. Therefore, when you get the bill in December, postpone your payment until January – when it is due. Pay the next one in December, so the total number of property tax payments in 2020 becomes two.

After that, it will be much more beneficial to keep itemizing your deductions.

 

Example

A married couple who file jointly have an annual income of $107,000. Before bunching, their property taxes ($5,000) and charitable contributions ($11,000) made a standard deduction of $24,000 possible for 2018 and $24,000 for 2019. When they use Itemized Deductions, they get $32,000 in 2018, but standard deduction brings the amount back to $24,000 in 2019. They save $1,695.

Tips to Make the Most of Bunching

Spend to Save while Itemizing

By spending as much as you can in deductible categories, you can save more when you itemize. Of course, we don’t recommend spending for its own sake. However, purchases, such as some medical treatments, are a good idea for when you have already crossed the medical deduction threshold.

Follow a Checklist

Don’t stick to just one kind of deduction. Make a checklist and unearth available options every year. For instance, gambling losses up to the extent of your winnings are deductible. Mileage expenses incurred during the commute to a charity are another example.

If you’d like to learn more about tax laws and your business, we at Akif CPA are here to help. Learn about our services here.

Do you have unique issues or concerns not discussed in this blog then please contact us by email or phone. We are here to help.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Akif CPA will not be held liable for any problems that arise from the usage of the information provided on this page.

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