Every tax season you’re given the choice of itemizing your deductions or taking the standard deduction. Unfortunately, many taxpayers fall just under the level to itemize, so they miss out on significant tax deductions.
If this situation sounds familiar, your tax planning may benefit substantially from a strategy known as “deduction bunching.” As the name implies, this effective tax technique involves bunching certain deductions together for a larger overall reduction of your tax bill. When used effectively, deduction bunching can result in considerable tax savings (usually every second year), particularly in the areas of medical expenses, property tax payments, and charitable deductions.
Take, for instance, bunching your property taxes. In many cases, you can bunch property tax payments by paying 1.5 times your yearly tax liability this year and then only paying the remaining half next year, thus enabling your deduction this year to be bigger (although decreasing your deduction next year).
The same approach works for other deductible expenses such as charitable contributions or even medical bills. If you give a portion of your income to your church or other charity each year, you could prepay next year’s contribution through a lump sum in December, effectively doubling your charitable donation for your 2015 taxes. If you can prepay by handling orthodontics bills, for example, in a lump sum this year, rather than spreading out the costs over two years, your deduction for the current tax year is larger. This can be particularly crucial for medical expenses, as only medical expenses that exceed 7.5% of your income are deductible.
To ensure that you get the most from your deductible expenses, it’s best to work with experienced tax professionals who understand the ins and outs of timing your deductions appropriately. In Atlanta and beyond, Taxation Solutions, Inc. is happy to answer your questions about deduction bunching and how it can pay off for you. We have 40+ years of tax help experience, and you can count on our specialists to make a meaningful difference in your tax planning strategies.