As the year draws near a close, it is time to see if there are any moves you can make that will help reduce your annual income tax bill. The Tax Cuts and Jobs Act, passed in late 2017, complicated the matter of taking deductions, but there are some helpful options if you plan ahead.
The Tax Cuts and Jobs Act doubled the standard deduction. For tax year 2020, it’s now $12,400 for single filers and $24,800 for married filers. That affected many people who had few deductions because they are better off taking the standard deduction.
A Possible Solution
That’s where bunching deductions comes in. Here’s generally how it works: By paying two years’ worth of qualifying deductible expenditures before year’s end you may be able to exceed the standard deduction and deduct those expenses on your 2020 return. Then next year, take the standard deduction. Alternatively, you can push deductions into next year and take the standard deduction this year.
What Deductions Qualify?
Some examples of deductions that you could bunch include:
Charitable Giving – Rather than making your usual contribution every year, it may make more sense to make a double contribution every other year – or a triple contribution every third year. That way, you aren’t effectively taxed on your charitable deductions.
Medical Expenses – If your medical expenses are in excess of 10% of your adjusted gross income, you can deduct them. So, it may make sense to schedule that elective surgery you had planned before year’s end—or next year, if you expect higher medical expenses.
Property Taxes – If this year looks to be a high earning year, you could pre-pay property taxes that have actually been assessed, but this deduction is also now capped at $10,000. If moving to a new state, shift deductions to the higher-tax state.
This is a simplified list of potential deductions. Talk to your tax and financial professionals to see how bunching deductions may help you to maximize your tax breaks.