15 Jul How Bunching Itemized Deductions Could Increase Your Tax Refund
One of the major tax law changes brought on by the Tax Cuts and Jobs Act was nearly doubling the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. The law also placed a cap on many common deductions that taxpayers would normally itemize. These two changes mean that fewer people are likely to itemize their deductions on their tax returns, since the standard deduction will yield a higher benefit in most years.
However, if your itemized deductions come close to the standard deduction amount, you may benefit from bunching your itemized deductions. Here’s what you need to know about this strategy.
What Is Bunching?
Bunching essentially means paying two years’ worth of deductions in a single tax year—or, as close to that as you can reasonably manage. This leaves you with a much higher amount in itemized deductions in one tax year, making it worth taking the itemized tax deduction instead of the standard deduction for that year. Then, in the following year, your itemized deductions would be far lower, and you would then take the standard deduction.
By bunching your itemized deductions over alternating years, you can get the maximum benefit on your tax return. Of course, this does require you to plan ahead, and look at your taxes two years in advance in order to plan properly. However, our tax planning services in Provo can help you to do this so that you can bunch your itemized deductions and save on your taxes.
Which Deductions Can Be Bunched?
In order for a deduction to be “bunchable,” you need to be able to prepay on it. Here are a few examples of tax deductions that work well with bunching:
- Charitable Contributions – These are arguably the easiest deductions to bunch, because you control how much and when you give. For example, many of our clients make large charitable contributions to their respective churches. So, if you normally make your charitable contributions at the end of the year, you could postpone the payment by just a few weeks, and donate in January instead. This lowers the amount of your itemized deductions for the current tax year, likely making the standard deduction more beneficial to you. However, in the following year, you could pay your donation to the church in December, effectually doubling up on your charitable contributions for that tax year, and most likely making it more beneficial to itemize your deductions.
- Medical Expenses – Obviously, you should always receive the medical attention you require as soon as you need it. But if there are elective medical procedures you’ve been considering, or any home medical equipment you’ve been considering replacing, you may be able to bunch these as well. It’s also important to remember that you can currently only deduct medical expenses that exceed 10 percent of your adjusted gross income. So, if you’re able to bunch those expenses, you may be able to deduct some expenses that you wouldn’t have been able to take otherwise.
- Property Taxes – First, please be aware that you can only deduct property taxes that have already been assessed; this means you have to have received the tax bill before you paid it, and you cannot deduct anticipated taxes. However, most people receive their property tax bill in December, with a due date in January. So, if you postpone your payment on this year’s bill until January, then pay next year’s bill as soon as you receive it in December, you’ll have two property tax payments in 2020, which could make it much more beneficial to itemize your deductions. (Please also note that property tax deductions are capped at $10,000 currently.)
Here’s an Example
So, let’s take a look at an example of how this might work. Let’s say Dick and Jane receive a $7,000 property tax bill in December. Last year, they waited until January to pay the property tax bill, but this year, they pay it right away; they have now paid $14,000 in property tax this year, which means they can deduct the maximum $10,000. They also paid $8,000 in mortgage interest this year, which can also be deducted (however, these deductions don’t usually work for bunching).
Dick and Jane also make about $9,000 in charitable contributions to their church each year, which they usually pay in January. This year, they decide to make that contribution at the end of December instead, which means they’ve donated $18,000 this year. Add this to their mortgage interest and property taxes, and Dick and Jane now have $36,000 in itemized deductions—far more than the $24,000 standard deduction. So, for their 2019 taxes, they choose to take the itemized deduction for the larger benefit.
All other things remaining equal, this leaves Dick and Jane with only their $8,000 of mortgage interest that would be considered deductible next year. However, they can now take the standard deduction of $24,000. So, between the two tax years, Dick and Jane would receive a total of $60,000 in deductions whereas, without bunching their deductions, they would have likely only received $48,000 in deductions.
As you can see, bunching can have enormous benefits for many taxpayers. If you think you might be able to benefit from bunching your itemized deductions, give us a call. Our tax planning services in Provo can help you to determine the best way to time your deductible purchases and payments, so that you can receive the greatest benefit on your tax return.