The strategy of bunching deductions involves consideration of the timing of your various expenditures and/or deductions including real estate and excise taxes, state income taxes, charitable contributions, certain interest payments, medical expenses and the like. The concept of this strategy is that your itemized deductions are typically compared against a Standard Deduction that varies depending upon your marital status and your age.
In some instances you may only be exceeding the otherwise available Standard Deduction by a small amount. In this case, a beneficial strategy might be to postpone some of those deductions until the next tax year and accelerate similar expenses from the next following year. This will bunch all of your deductions into the middle of three years and create an amount that will substantially exceed the otherwise available Standard Deduction. It will give you the best tax result when compared from year to year.
This strategy also has applications in the context of higher earners who will have a reduction in their otherwise available itemized deductions simply by virtue of the level of their income. Specific examples of this include the fact that medical expenses are deductible only to the extent that they exceed a 7.5% threshold of one’s Adjusted Gross Income; and miscellaneous itemized deductions, including the fee that you pay to your tax professional, employee business expenses and the like, are subject to a 2% threshold. It is possible that some taxpayers will find that they are able to benefit from higher amounts of itemized deductions by the applying this strategy of bunching.
By: Bruce M. Fogel, Esquire
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