For part two of our tax planning series, we’re going to review one of the most reliable tactics for reducing taxes: which is bunching. This strategy is the process of accelerating deductible expenses, such as real estate taxes, charitable contributions, etc., into a given year so that you can itemize your deductions.
This strategy has become even more helpful since the passing of the 2017 Tax Cuts and Jobs Act, which raised the standard deduction for taxpayers. This higher deduction — $12,950 for single filers and $25,900 for those married filing jointly in 2022 — allows more taxpayers to take the standard deduction rather than itemizing each year.
However, before federal employees take the standard deduction, it may be worth reviewing whether a bunching strategy would chip more off their tax bill.
So how exactly does bunching work? Here’s how: You bunch as many tax-deductible expenses as possible into a single tax year, making it more likely that your itemized deductions will exceed the standard deduction, thus, reducing your current tax bill more.
Then the following year, you take the standard deduction and can continue to alternate the years that you itemize moving forward.
For example, say you make charitable contributions every year; it may be more financially wise to double your charitable contribution in one year and then skip your donation the following year.
For instance, donating on January 1st and then again on December 31st. In effect, you’re still donating on an annual cadence, yet your donations will be made in one year for tax purposes.
Other common expenses that can be strategically timed include estimated state income taxes, 529 contributions, and property taxes.
Which Federal Employees Benefit From Bunching?
Ok, now that we know what bunching is, which federal employees should utilize this strategy?
Well, bunching works best when the amount you usually itemize doesn’t exceed the standard deduction but is close.
For example, if you have annual medical expenses that equal 7% of your AGI, you’ll never get to itemize those expenses since the threshold is 7.5%. However, if you can push any of those routine expenses into the following year, you may be able to exceed the 7.5% threshold and deduct those expenses.
Meaning, that if you’ve been delaying certain medical treatments, you’ll get more out of your expenses if you spend that money in a year when you’re over or near the deduction threshold.
Hence, without this strategy, you’d likely take the standard deduction every year, but by bunching every other year, you can get a higher deduction in the bunched years, reducing the tax you owe in those years.
While the 2017 Tax Cuts and Jobs Act has made bunching more advantageous for many federal employees, every person’s situation is different, and the exact planning steps you should take will depend on your financial situation and goals.
Although we covered the most common expenses that can be bunched, we did not review every potential strategy, as bunching can also be done with retirement plans and certain business expenses.
Lastly, spending just to deduct expenses is never advisable; this is why I recommend you consult a financial or tax advisor to explore whether you should utilize the bunching strategy.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.