Article Highlights:
- Standard Deductions
- Itemized Deductions
- Bunching Strategy
- Medical Expenses
- Taxes
- Charitable Contributions
The 2017 Tax Cuts and Jobs Act (TCJA) made several changes, including almost doubling the basic deduction and limiting or suspending certain itemized deductions for tax years 2018 through 2025. For 2018, the new standard deduction amounts were:
- $12,000 for single individuals and married people filing separately (MFS),
- $18,000 for heads of household, and
- $24,000 for married taxpayers filing jointly (MFJ).
Since then, these figures have been adjusted for inflation; for 2021, they are as follows:
- $12,550 for single and MFS,
- $18,800 for heads of household, and
- $25,100 for MFJ.
You can itemize the following deductions if your total deductions exceed the standard deduction amount for your filing status:
- Medical expenses, to the extent they exceed 7.5% of your adjusted gross income (AGI);
- Taxes paid that year (for state or local income or sales tax as well as real property or personal property taxes), limited to $10,000;
- Home mortgage interest;
- Investment interest;
- Charitable contributions;
- Gambling losses, to the extent of your gambling winnings; and
- Certain infrequently encountered miscellaneous “tier-1” deductions.
As the end of the year approaches, remember to use bunching as a tax tactic. You may be a strong candidate for the bunching method if your itemized deductions are frequently close to the standard deduction level. In this method, you take the standard deduction one year and itemize the following year. This is accomplished by budgeting for your deductible expenses so that you can take advantage of them in the years when you itemize deductions. Medical expenditures, taxes, and charitable contributions are all commonly lumped together as deductible expenses. If you believe this method will help you in 2021, you should act before the end of the year.
To demonstrate how bunching works, consider the following instances of deductible payments that allow enough flexibility to make this strategy worthwhile:
- Medical Expenses – Let's say you hire a dentist to put your child's braces on. You can choose between a lump-sum payment or a payment plan with this dentist. If you pay in one lump amount, the entire cost will be applied to the year in which you paid it, significantly boosting your medical expenses for that year. If you don't have the cash, you can pay using a credit card, which is classified as a lump-sum payment for tax purposes. If you do, keep in mind that the interest on that payment isn't deductible; you'll have to weigh whether paying the interest is worth the higher tax deduction. Another key point to remember about medical deductions is that only the portion of your medical expenses that exceed 7.5 percent of your adjusted gross income is deductible.
If your current year's income is unusually high, you may want to defer your medical expense payments until the next year (for example, if 7.5 percent of next year's income is less than 7.5 percent of this year's income).
- Taxes – Property taxes are usually billed in the middle of the year and can be paid in semiannual or quarterly installments in most places. As a result, you can choose to pay them all at once or in installments. This allows you to group your tax payments by paying only one semiannual (or two quarterly) installment(s) in one year and deferring the remaining semiannual (or two quarterly) installment(s) until the following year. You will be able to deduct 1 1/2 years of taxes in one year and half a year of taxes in the following year if you do so. However, if you're considering making late property tax payments as a form of bunching, proceed with caution. Any possible tax savings will almost certainly be wiped out by late payment penalties.
Any state income tax paid or withheld during the year is deductible on federal taxes if you live in a state that has one. If you pay quarterly projected state tax payments, for example, the fourth quarter expected payment is usually due in January of the following year. This permits you to make the payment by December 31 (allowing you to deduct it from your current year's tax return) or pay it in January before the due date (allowing you to deduct it from your next year's tax return).
Here's something to keep in mind about itemized tax deductions: Because itemized tax deductions are limited to $10,000 under the TCJA, there is no benefit to prepaying taxes if the total amount owed is already $10,000 or more. Furthermore, because taxes are not deductible at all under the alternative minimum tax, itemized deductions provide no benefit to anyone who pays that tax.
- Charitable Contributions – Because charitable payments are made entirely at the taxpayer's choice, they are a good fit for bunching. If you typically tithe to your church, for example, you can make your regular payments throughout the year and then pay the entire tithe for the following year in one large sum in December of the current year. You can double your contributions for one year and have no charitable deductions the following year if you do this for all contributions that you typically make to recognized organizations. During the holiday season, charities are typically particularly busy in their solicitations, allowing you to make forward-looking contributions at the end of the current year, or simply wait a short time and make them after the end of the year.
There is a limit on charitable deductions, although it is substantial for most types of contributions: 60 percent of AGI or 30 percent of AGI for contributions of capital gain property deducted at fair market value. There are also other limits that are rarely encountered. Itemizers can choose to suspend the 60 percent-of-AGI cap for most cash contributions in 2021, including checks and credit card payments. If the taxpayer makes the election, the taxpayer's other contributions are calculated first, up to the 60, 50, 30, or 20% of AGI limit; subsequently, cash contributions are allowed above those levels, up to 100% of AGI. Any excess over 100% of AGI is subject to a 5-year carryover. Regular AGI restrictions will apply if no election is made.
If you choose to take the standard deduction rather than itemize your deductions in 2021, you will be able to deduct up to $300 ($600 on a joint return) for financial contributions to qualified charities. (This non-itemizer deduction is not available to donor-advised funds or private foundations.)
Please call if you have any questions regarding bunching your deductions or would like to conduct some in-depth brainstorming about how this strategy could assist you.