Bunching Tax Deductions to Meet the Threshold for Itemizing
Every year you must decide whether to take the standard deduction on your income taxes or your personal deductions. Obviously, you should itemize only if your total itemized deductions for the year are more than the applicable standard deductions. If you don’t have enough itemized deductions to itemize, you lose these deductions forever – you cannot save them up and use them in a later year.
If you don’t have enough itemized deductions to itemize every year, consider bunching your itemized deductions.This means that you pile on your itemized deductions every other year, giving yourself the maximum itemized deduction for that year. You then take the standard deduction in the alternate years, when you have fewer itemized deductions. In 2020, the standard deductions increase to $24,800 for married filing jointly or $12,400 for single filers. It could be harder to have itemized deduction than you did before. During the year you plan to itemize, do everything you can to make your itemized deductions exceed your standard deduction. Pay every bill that will result in an itemized deduction.
If you want to try to increase your itemized deductions to get above the standard deduction rate for the year, here are some ways to bring expenses into the current year.
Example: Bunch Itemized Deductions (Married Filing Jointly with annual income $107,000)
Before bunching 2018 2019
Real Estate Tax $5,000 $5,000
Charitable Contribution $11,000 $11,000
$16,000 $16,000
They have to use standard deduction $24,000 for 2018 and $24,400 for 2019.
Their marginal tax rate is 22%.
After bunching 2018 2019
Real Estate Tax $10,000 $0 (2 years)
Charitable Contribution $22,000 $0 (2 years)
$32,000 $0
They are able to use itemized deductions of $32,000 in 2018 and can still use standard deduction which is $24,400 in 2019. Over the two year periods, bunching tax deductions saves them around $1,750. In the first case, they have deductions of $24,000 and $24,400 or $48,400 the sum of the two years standard deductions. In the second case, they use itemized deductions of $32,000 in 2018 and get the standard deduction of $24,400 for total deductions of $56,400.
If you don’t have enough itemized deductions to itemize every year, consider bunching your itemized deductions.This means that you pile on your itemized deductions every other year, giving yourself the maximum itemized deduction for that year. You then take the standard deduction in the alternate years, when you have fewer itemized deductions. In 2020, the standard deductions increase to $24,800 for married filing jointly or $12,400 for single filers. It could be harder to have itemized deduction than you did before. During the year you plan to itemize, do everything you can to make your itemized deductions exceed your standard deduction. Pay every bill that will result in an itemized deduction.
If you want to try to increase your itemized deductions to get above the standard deduction rate for the year, here are some ways to bring expenses into the current year.
- Property taxes: If you own a home, pay two years’ property taxes in the current year. New rule in 2018: you are limited to a total of $10,000 for all state and local taxes.
- Charitable contributions: You could contribute double what you ordinarily do and donate nothing the following year. For the tax year 2020, you can contribute more since the adjusted gross income limit for charitable contribution has been increased to 100% from 60%
- Medical expenses: If you or a family member needs to have elective surgery or an expensive dental procedure, have it this year. Stock up on prescription medications, get new eyeglasses. If your doctor has advised you to make home improvements to safeguard your health—for example, installing an air filtration system to protect from allergies—make them this year.
Example: Bunch Itemized Deductions (Married Filing Jointly with annual income $107,000)
Before bunching 2018 2019
Real Estate Tax $5,000 $5,000
Charitable Contribution $11,000 $11,000
$16,000 $16,000
They have to use standard deduction $24,000 for 2018 and $24,400 for 2019.
Their marginal tax rate is 22%.
After bunching 2018 2019
Real Estate Tax $10,000 $0 (2 years)
Charitable Contribution $22,000 $0 (2 years)
$32,000 $0
They are able to use itemized deductions of $32,000 in 2018 and can still use standard deduction which is $24,400 in 2019. Over the two year periods, bunching tax deductions saves them around $1,750. In the first case, they have deductions of $24,000 and $24,400 or $48,400 the sum of the two years standard deductions. In the second case, they use itemized deductions of $32,000 in 2018 and get the standard deduction of $24,400 for total deductions of $56,400.