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How To Maximize Your Tax Benefit By Combining Deductions Together

by
Keith Vincent
on
6/3/2015
How To Maximize Your Tax Benefit By Combining Deductions Together

Many people are unable to itemize deductions, or if they can they are not getting the maximum benefit that they would if they used a technique that combines deductions together that's known as bunching. 

Almost all taxpayers are able to take the standard deduction allowed by the tax code, or if they find that it provides a greater benefit then they can itemize individual deductions. In most cases, when tax time rolls around people determine what their deductions would add up to and compare it to their standard deduction, selecting the option that provides them with the biggest benefit. Bunching takes this approach to a different level, taking a more proactive approach by planning and timing payments for items that are tax-deductible within a single year so that you can get a bigger benefit from itemizing in one year, then taking the standard deduction the following year.

The first step in this strategy is to understand what expenses can be itemized. State and local income tax or sales tax, medical expenses, property taxes and investment interest are all deductions that can be itemized. So are your home mortgage interest, unreimbursed job-related expenses, casualty losses and charitable deductions. Any and all of these can be bunched together, but the expenses that are most frequently bunched together are medical expenses, charitable deductions and tax payments. Other possibilities exist, but they are the ones that are easiest to plan ahead for.

Here are some examples of how bunching can be used:

  • Taxes – Tax authorities general send out bills for local property taxes in the middle of the year and provide taxpayers with the ability to space out payments instead of paying in a lump sum. By paying a full year's worth of taxes as well as about half of a years' worth in the same year, you can take a deduction for paying one and a half years' worth of taxes in a single year, thus getting a greater benefit. Be cautious about your timing and make sure that you are paying ahead rather than paying late, as that will cause a late payment fine to be levied against you. The same strategy can be used with the way that you pay estimated state income tax. The fourth quarter is not generally due until the first quarter of the following year, but paying it at the end of the tax year allows you to take a greater deduction, increasing the itemization amount and allowing you to take the standard deduction in the off year. If you are considering this strategy, be aware that you are only able to take deductions for the taxes that you pay for regular taxes. If you qualify for the AMT, this strategy will not provide you with a benefit.
  • Charitable Contributions – Because giving an organization a charitable contribution is completely voluntary and has no deadline, you can easily apply the bunching strategy to your giving. You can give more in the years that you plan to itemize and less on the years when you take the standard deduction. Just make sure that you are careful with the records that you keep and retain all receipts in order to clearly show the dates on which you made the discretionary contribution.
  • Medical Expenses – Though there is nothing that you can do about emergency medical expenses, there are many treatments that can be planned in order to maximize expenses within the course of a year and thus raising the numbers high enough to be itemized. If your expenses for the year have already been high and you know that you have an elective procedure coming up, you can plan it for the end of the year rather than for the following year. Even if you don't have the cash available for the payment during the year (which would be required in order for the expense to be counted towards the tax year), you can put it on a credit card and pay the balance over time. If you do this, it is important to remember that you can not deduct the credit card interest. Keep in mind that you are only able to deduct medical expenses that exceed ten percent of your adjusted gross income (AGI). Those who are over 65 can deduct medical expenses over 7.5 percent over adjusted gross income through 2016, and that percentage increases to ten percent in 2017. It is important to keep this in mind, as if your medical expenses do not reach this level or if you are eligible for the Alternative Minimum Tax (AMT) then you will not be able to deduct these expenses.

On the other hand, those who are anticipating a particularly high income year on a particular year should give consideration to delaying medical expenses until a year when their income is expected to be lower, and therefore the threshold is lower.

Bunching can be a very useful strategy for lowering your tax burden, but should be done with a complete understanding in order to get the biggest benefit. For more information on how this tax technique can work for you, contact Ken Riter CPA at (801) 613-0900 to set up an appointment with one of our professionals.

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Keith Vincent

Keith Vincent

Ken Riter is a Certified Public Accountant based in Holladay, Utah. He is a graduate of the University of Utah and brings broad financial and tax preparation experience to bear for each of his clients. With strong computer systems experience, Ken has empowered many business clients to gain better control of their finances by utilizing the power of the computer. His years of tax planning and tax preparation experience give his clients a distinct advantage in their tax needs. Starting in Salt Lake City, our company history is built on a tradition of service, technical expertise, and innovative thinking to meet the needs of a rapidly changing world.

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