Bunching Itemized Deductions: Maximize your Tax Savings

/ Freidel & Associates, LLC/

When it comes to optimizing your tax situation, every penny counts. Bunching itemized deductions is a tax strategy that can potentially maximize your deductions. Bunching involves timing and grouping deductible expenses to surpass the standard deduction threshold in specific years. In particular, taxpayers who do not often itemize deductions, or perhaps are right over the itemized deduction threshold, are encouraged to evaluate this strategy to maximize the value of itemized deductions.

Charitable Contributions

One common strategy for bunching itemized deductions is to consolidate two (or more) years of charitable donations into a singular year. This can be achieved through different methods, with two common approaches being:

  1. Pre-Funding with a Donor Advised Fund: Utilize a donor-advised fund, which acts essentially as a charitable “checkbook”. In the first year, you "pre-fund" the donations by loading up this fund. In following year(s), you would direct the distribution of donations to qualifying charities according to your preferences.

  2. Holding Back Donations: Another method is to hold back the donations and place them in a savings account for one or more year. By doing so, you can contribute the accumulated donations in January of a following year, and thereby essentially combine multiple years of giving into a single tax year

Property Taxes

In some states (including SD), another deduction you can capitalize on is property taxes. For example, if it is 2022 and you have paid your 2021 property taxes in arrears, you can also pay your 2022 property taxes prior to the end of 2022, essentially doubling up on this deduction. Keep the $10,000 per year limitation on state and local taxes of all kinds, as this may limit the benefit of doubling this item up, depending on your specific situation.

Medical Expenses

Bunching medical expenses, especially higher costs like surgeries or treatments, in a specific year helps you surpass the threshold for deductibility based on your adjusted gross income (AGI). Note: Qualified medical expenses can be generally be deducted as itemized deductions in the amount exceeding 7.5% of your AGI.

So in summary, implementing this strategy is as simple as 1, 2, 3!

  1. Review Your Expenses: Analyze potential deductible expenses like medical costs, mortgage interest, state and local taxes, charitable donations, and unreimbursed employee expenses.

  2. Evaluate Your Income: Calculate projected adjusted gross income to determine the standard deduction and threshold limits for deductions. If you have an extremely high year of income with an unusually high tax bracket as compared to your normal situation, consider combining multiple years of deductions in that year to maximize the value of your deductions.

  3. Plan Your Deduction Bunching: Identify advantageous years for bunching deductions based on expense analysis and income projection. Concentrate deductible expenses in those years to surpass the standard deduction.

As always, please consult your tax advisor to understand this potential strategy. When we face more complex versions of this situation, we often run multi-year simulations to understand the financial benefit and trade-offs of different strategies.