With the near doubling of the standard deduction amount to $12,000 for single filers and $24,000 for joint filers this year, a new itemizing strategy is emerging. The idea is being called bunching by some and it is a potential strategy every taxpayer should understand.
How bunching helps to minimize tax
With tax bunching, you move multiple years (two or three) of deductible expenses into the one year you intend to itemize. In effect, you minimize your itemized deductions in the year(s) you use the standard deduction and take all of the expense in the one year you wish to itemize.
For example, assume Jane is single and has $2,500 of charitable donations and $7,500 of other itemized deductions, in each of three years. Since Jane is below the $12,000 standard deduction, she could not itemize in any year. Then it dawns on Jane to push all her charitable giving into year 2. This is what happens:
- Year 1: $7,500 in deductions: Jane uses the $12,000 standard deduction
- Year 2: $15,000 in deductions: Jane uses the $15,000 itemized deduction
- Year 3: $7,500 in deductions: Jane uses the $12,000 standard deduction
Result: Jane reduces her taxable income by $3,000 over the three-year period!
Assess your bunching option
Using the bunching idea requires planning. Here are some ideas:
- Know how close you are to the deduction limit. Because of the many new limits on qualified itemized deductions, you will first need to estimate how close you are to the new thresholds. Do this by looking at your 2017 tax return and seeing how close you will be. Remember to limit your state and local tax deduction to $10,000 and eliminate any miscellaneous itemized deductions.
- Look at medical and dental expenses. This is a potential bunching expense group if you project these expenses will surpass 7.5% of your income. Schedule non-emergency expenses, such as medical exams and dental cleanings, in a year they will clear the deduction threshold. Plan other electives such as crowns and braces in one year versus many. You may even wish to move up health insurance premium payments.
- Consider charitable donations as bunching options. This is the largest potential bundling area. Make all your gifts in a year you plan to surpass the standard deduction threshold. But keep an eye on the 60 percent-of-AGI annual limit. Alternatively, consider postponing contributions to January of the following year if you won’t itemize.
- Use mortgage interest as another bunching tool. The deduction for interest paid on new acquisition debt up to $750,000 (or $1,000,000 if the loan was made prior to Dec. 15, 2017) is still available. Consider pre-paying the next month’s mortgage payment at the end of the year to increase the deductible interest in the year you wish to itemize.
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