Do you want to save money on your taxes without having to spend any extra money? A tactic called “itemized bunching” could be the way to go. Itemized deductions are used in lieu of your standard deduction, $6,300 for a Single taxpayer and $12,600 for Married filing Jointly, and can amount to significant tax savings. You can get deductions for a number of expenses, including medical expenses, tax payments, mortgage interest payments, charitable contributions and others. If you itemize and decide you want to save $50 in taxes at year-end you would have to donate an additional $125 - $500 (depending on your tax rate). Instead, you can use itemized bunching to prepay an expense for no additional cost.
Itemized bunching works successfully if taxpayers are close to the threshold for using the standard deduction and have the ability to prepay or defer expenses. Property tax payments can often be made early, state estimated taxes are typically due January 15th and can be accelerated to December, if you are charitably inclined you can also accelerate or defer your contributions. If you are able to bunch your deductions every year, the savings can stack up.
Another important consideration for itemized bunching is whether you will be in a higher tax bracket in a particular year. Considering the above examples, if you have a marginal tax rate of 33% in 2016 and 25% in 2017 you will save an additional $400 by using itemized bunching in the year with the higher rate.
If you are in AMT (the “alternative minimum tax”) these strategies may not work for you. Please call us if you have any questions or want to consider the impacts of itemized bunching upon your tax return. Our team is prepared to assist you and we can even provide you with a tax projection showing your tax savings if you are a candidate for itemized bunching.