Bunch Your Deductions to Save on Taxes

by Michael on Oct 16, 2013 · 4 comments

Image of Tax Deduction Under a Magnifying Glass

We recently received our property tax bill, but I’m not paying it. Not until next year, that is.

Yes, I’ll have to pay a small penalty for missing the November deadline, but the eventual income tax savings from this delay will be more than enough to cover that loss.

Similarly, we’re holding off on the estimated payments for our 2013 state income taxes. I’ll send a check in January. And we’re also delaying our charitable contributions until early next year.

A year from now, we’ll do the opposite. We’ll pay our property taxes on time, accelerate the final installment of our 2014 state estimated tax payments into December, and make our charitable contributions before the end of the year.

Why are we doing this? Because otherwise our deductible expenses would fall short of the standard deduction (currently $12,200 for married filing jointly) in both 2013 and 2014 and we’d lose out on potential tax savings.

Bunching deductions

By “bunching” our deductions into alternating years, we’ll alternate between taking the standard deduction one year and itemizing our deductions the next. In years that we itemize, we’ll thus reduce our tax bill significantly.

As a simple example, let’s say that our deductible expenses total up to ca. $12k in a typical year. That’s just below than the standard deduction, so we wouldn’t bother itemizing our deductions.

But if we were able to shift (say) half of those deductible expenses from this year to next, we could take the standard deduction this year and then itemize next year to the tune of $18k in deductible expenses.

That’s an extra $6k (more or less) vs. the standard deduction in alternating years. Depending on your tax bracket, that could shave upwards of $2k off our federal income tax bill every other year.

Specialized cases

One might also consider bunching their deductible expenses in more specialized cases. Consider, for example, medical expenses. These are only deductible to the extent that they exceed a certain percent of your AGI.

Unfortunately, the threshold for deducting medical expenses increased from 7.5% of AGI to 10% of AGI in 2013. Thus, being able to deduct medical expenses is a pretty uncommon thing for most folks.

Nonetheless, it’s at least theoretically possible to delay (or accelerate) the payment of medical expenses such that they exceed the 10% AGI threshold in certain years. If you can pull it off, great. You’ll have a lower tax bill whenever you can do it.

There are also certain “miscellaneous” expenses that can be deducted on Schedule A to the extent that they exceed 2% of your AGI. These include things like unreimbursed employee expenses, tax prep fees, and certain “other expenses.”

You can get a full rundown of what qualifies in IRS Publication 529.

But beware the AMT…

Now for a few words of caution. As you may be aware, certain deductions are disallowed under the Alternative Minimum Tax (AMT). This includes things like state income tax payments, property taxes, etc.

Thus, depending on your situation, it’s possible that you’ll bunch these deductions into a given year only to have them disallowed under the AMT.

While we’ve been subject to the AMT in the past, we haven’t been hit by it in several years, and I don’t expect it to be a problem going forward. Thus, we’ll be bunching our deductions for the foreseeable future. But forewarned is forearmed.


1 thepotatohead October 17, 2013 at 11:35 pm

Hmmm, interesting concept, actually sounds like that could work nicely especially if bunching them can knock you down into a different bracket. I guess my property/school taxes work different though. Ours get sent out twice a year and if you don’t have everything paid by the end of the year it gets sent to collections, so I don’t think I could roll mine over unless that collections fee was smaller then the tax savings.

2 SuburbanFinance October 18, 2013 at 9:01 am

Hmm. I’m not sure how this works in Canada, but I’ll have to look into it. Thanks for the tips.

3 Edward Antrobus October 18, 2013 at 10:47 am

I’m usually not a big fan of this advice because bunching usually means that the next year you are then paying more and ofsets any gain. But if your itemized deductions are hovering near the standard deduction rate like that, it actually works.

Next year I’m going to try saving receipts to see if I come close. Without a mortgage, it’s tough to see itemizing winning, but I’ve been doing a LOT of driving for work.

4 Alan October 18, 2013 at 12:28 pm

I’ve been doing this for years, and it has worked quite well for me. I’ve never heard it called “bunching” before. I’ve always referred to it as “doubling up.”

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