Benefits of Bunching Itemized Deductions – CPA Firm in Springfield Missouri
The Tax Cuts and Jobs Act resulted in a drastic deduction in the number of taxpayers who itemize deductions, because it is now difficult to have enough itemized deductions to exceed the standard deduction amount. One strategy to consider is working with your tax accountant to bunch your itemized deductions and pay two years worth of deductible expenses in a single tax year.
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 when your itemized expenses are much lower.
Over time, you’re essentially paying the same amount of money, but by bunching those deductions forward or backward by a month 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. This strategy requires some careful planning as you have to consider your taxes and expenses two years at a time.
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 work well with bunching. Some examples of these include:
Many individuals receive their property tax bills in December, with a due date in January. 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. This only works for property taxes already assessed. You need to have actually received the tax bill and cannot deduct payments on anticipated property taxes. Only up to $10,000 of property taxes can be deducted.
Charitable contributions are typically the easiest type of deduction to bunch because you get to choose when and how much you contribute. If you typically make your charitable contributions at the beginning of the year, you could make next year’s donation a few weeks early and pay it in December of the same year. This would put two years’ worth of charitable contributions in the same tax year and give you more deductible expenses for your return.
If there are elective medical 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 tax benefit. Additionally, only medical expenses that exceed 10 percent of your adjusted gross income are considered deductible. Properly timing such expenses could allow you to receive deductions on your return that you would not have otherwise qualified for.
Bunching your itemized deductions can have significant tax benefits if you’re willing to take the time and effort to plan ahead. If you would like to learn more about bunching your itemized deductions, please consult your tax advisor at Schultz, Wood & Rapp. Our CPA firm in Springfield Missouri can help you make informed and strategic decisions that will allow you to get the most out of your tax return.