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How to Save Money by Bunching Itemized Deductions

Looking to maximize your tax savings? If so, you might be able to benefit from bunching your itemized deductions. Bunching deductions is a way of strategically timing when you pay your expenses to maximize your taxable deductions. How does this work? 

The easiest deduction to bunch is charitable donations. Rather than donating the same amount every year, you combine your donations into one bunch year. By concentrating as many deductions into one year as legally possible you can maximize your itemized deduction in the bunch year and tax the standard deduction in the other year. 

Let’s illustrate this with an example. Let’s pretend a married couple has itemized deductions totaling $24K, of which $11K are charitable contributions. Their standard deduction for 2022 is $25,900. By bunching those charitable contributions they can donate $22K in one year, bringing the total itemized deduction for the bunch year to $35K. Itemized deductions will only add up to $13K in the other year but this couple will be able to use their $25,900 standard deduction. For a high earning couple in the 35% marginal tax bracket, this strategy will result in tax savings of over $3K! 

Here’s another look at this example:

Can any other itemized deductions be bunched? Depending on your circumstances property taxes and medical expenses can be strategically bunched. Property taxes can only be deducted after they’ve been assessed. So a bunching strategy would depend on the billing cycle and due date of your property taxes. Let’s say you receive a property tax bill in December that’s not due until January. You could pay in January one year and then pay again in December of the same year. That way you’d be able to bunch two years of property taxes into one year. 

Medical expenses can be tricky since they have to exceed 7.5% of your adjusted gross income to be itemized. But occasionally you can make strategic choices that might allow you to take advantage of the bunching strategy (i.e. multiple children with orthodontia needs).

If you’ve been close to itemizing your deductions then bunching is a strategy that might save you significant money. If you want to discuss your financial situation, schedule a complimentary call today.  

Scott Caufield, CFA, CPA