How You Can Reduce Your Tax Bill by Bunching Itemized Deductions

We’ve touched briefly on bunching charitable contributions in a past blog, but did you know that there are actually several different types of deductions that can be bunched? With the new, higher standard deduction set by the Tax Cuts and Jobs Act—$12,000 for individuals and $24,000 for married couples filing jointly—it may take more than just bunching your charitable contributions to get the full benefit of this tax planning strategy.

Here’s a deeper look into bunching, which deductions may work for you, and how you can benefit from bunching your deductions. If you think you might be able to benefit from this type of tax planning strategy, contact us for assistance with Provo tax planning services.

What Does Bunching Mean?

In essence, bunching means that you pay two years of deductible expenses in a single tax year—at least, a far as you are able to do. Doing so significantly increases the total amount of your itemized deductions for one tax year, while significantly decreasing them for the next year. This enables you to itemize your deductions on the years where you have those higher expenses, and take the standard deduction in the years that your itemized expenses are much lower.

By bunching those deductions and alternating between itemizing and taking the standard deduction, you can get the maximum benefit on your tax return, and potentially save thousands of dollars in taxes. Obviously, this strategy does require quite a bit of forethought, as you have to consider your taxes and expenses two years at a time. However, this is something we can help manage for you.

What Types of Expenses Will Work?

Since you must be able to time your payments just right in order for bunching to work, only deductible expenses that allow you to prepay are “bunchable.” Here are a few common types of deductible expenses that work well with bunching:

  • Property Taxes – Many individuals receive their property tax bills in December, with a due date in January. So, if you paid last year’s property tax in January of this year, you could pay this year’s property tax bill in December, as soon as you receive it. This means you’d be paying two deductible property tax bills in a single year, doubling up on this deductible expense. Please be aware, however, that this only works for property taxes already assessed; in other words, you need to have actually received the tax bill, and cannot deduct payments on anticipated property taxes. Additionally, only up to $10,000 of property taxes can be deducted.
  • Charitable Contributions – As we mentioned, we’ve touched on bunching charitable contributions before, and they are typically the easiest type of deduction to bunch. This is because you get to choose when and how much you contribute. Many of our clients, for example, make large contributions to their churches. If you typically make your charitable contributions at the beginning of each year, you could make next year’s donation a few weeks early and pay it in December of this year instead. This would put two years’ worth of charitable contributions in this tax year, and give you more deductible expenses for your return.
  • Medical Expenses – First, allow us to say that you shouldn’t postpone necessary medical treatment for the sake of bunching; receive essential care as soon as you need it. However, if there are elective procedures you’ve been considering, or home medical equipment you’re thinking about replacing, you may want to consider timing these things to yield you a larger benefit. Additionally, only medical expenses that exceed 10 percent of your adjusted gross income are considered deductible. So, properly timing such expenses could allow you to receive deductions on your return that you would not have otherwise qualified for.

Let’s Look at an Example

Here’s a quick, simple example of how bunching can impact your taxes. Let’s say that you and your spouse receive your $6,000 property tax bill in December. You paid last year’s bill in January of this year, but you decide to pay this year’s bill right away. This puts both property tax payments on your 2019 taxes, for a total of $12,000 in property taxes paid this year. You can now deduct the maximum of $10,000 in property taxes this year. You also paid $7,000 in mortgage interest this year, which is deductible. (However, this is one of those deductible expenses that generally doesn’t bunch well.)

You also made a contribution to your church in January of this year, as you do each year, for $8,000. Instead of waiting until next January to make another contribution, you donate a few weeks early, and give an additional $8,000 in December this year, giving you a total of $16,000 in charitable contributions for this year. When added to your mortgage interest and property taxes, you have a total of $33,000 in deductions for this year—$9,000 more than the standard deduction. So, for this year, you would likely want to itemize your deductions to receive the higher benefit.

Assuming nothing changes significantly, next year, the only deductible expense you would have next year would be your $7,000 of mortgage interest. So, next year, you would take the $24,000 standard deduction. Between these two tax years, you would have received $57,000 in deductions; without bunching, you likely would have only received $48,000 in deductions between both years.

As this example illustrates, bunching can have significant benefits if you’re willing to take the time and effort to plan ahead. If you would like to learn more about bunching your deductions, and how this can help you, please contact us and ask about our Provo tax planning services. We’ll help you to make informed and strategic decisions that will allow you to get the most out of your tax return.