Deductions are one way to trim you tax bill. But since the Tax Cuts and Jobs Act (TCJA) of 2017 essentially doubled the standard deduction amounts, most taxpayers claim that set amount instead of collecting receipts and itemizing.
That’s the wisest tax move for most filers. But sometimes it pays to change your deduction method from year to year.
Bunching deductible expenses and alternating year-to-year between itemizing them and claiming the standard tax deduction can help you maximize the amount you use to cut your adjusted gross income (AGI) to a smaller taxable income amount.
Bunching is exactly what the name implies. You accumulate itemized tax claims into one year to make the most of them.
Basically, you pay two years’ worth of deductions in a single tax year. This tax strategy lets you get the most out of deductible expenses that otherwise would be wasted.
And that’s why not establishing, or at least exploring, a bunching strategy is this week’s second Tax Turkey to Avoid.
Standard vs. itemized deductions: You get the choice every year of claiming the standard amount or itemizing your tax-deductible expenses on Schedule A.
It’s easy to get in the habit of using the same deduction method every year, especially if you claim the much simpler standard amount.
But you’re not locked into one deduction choice. You should use the one every filing season that provides you with the most tax benefit. If that’s the standard in 2024 and itemized amounts in 2025, then file that way.
And here’s how bunching comes into play in making that decision.
Start with your standard amount, which depends on for your filing status.
For single taxpayers in 2024, that’s $14,600. It’s $21,900 for heads or households, and $29,200 for married couples who file jointly.
The standard deduction amounts increase in 2025 thanks to inflation to $15,000 for single filers; $22,500 for heads of households; and $30,000 for married filing jointly taxpayers.
Then total itemized expenses: If you have enough allowable itemized expenses to exceed those amounts, then by all means use that deduction method.
The most common expenses claimed on Form 1040 Schedule A include —
- medical payments that are more than 7.5 percent of your AGI;
- real property costs, such as mortgage interest (make your January payment before by Dec. 31 to count that one paid this tax year), and property tax payments;
- state income tax paid; and
- donations to Internal Revenue Service approved nonprofits.
A quick note about the property and income tax amounts. The TCJA set a $10,000 cap on the amount of state and local taxes, or SALT, that can be claimed annually as a federal itemized deduction.
The Republican-created law is set to expire at the end of 2025, but with the GOP in control of the House, Senate and White House next year, some type of SALT deduction provision is expected to remain in the Internal Revenue Code.
Bunching into one tax year: If your itemized expenses are close to exceeding your standard deduction amount, bunch some you had planned to spend next year into this tax year.
For example, make extra charitable gifts. You can give as much as 60 percent of your AGI.
In the medical area, schedule non-emergency, but physician recommended, treatments before year’s end. Ditto dental work. Buy extra prescription eyeglasses this year instead of waiting.
Those expenses could be enough to exceed your standard deduction amount, making itemizing worthwhile this year.
Or, conversely, if you know you’ll have more deductible expenses next year, push this year’s claims, such as donations, into January so you can bulk up the amount on next year’s Schedule A to get you past the standard amount.
Alternating itemized, standard claims: While bunching tax deductible expenses can create an itemized deduction advantage, it generally only works every other year.
When you pull or push allowable deductions into one year, it leaves little for you to claim on Schedule A in the current or following one.
That’s okay. Bunching is a multiyear tax strategy. And since you can alternate which deduction method, standard or itemized, you use each year, you’re in good shape.
Of course, you need to keep track of what the standard deduction amount is each tax year so you can make sure you potential itemized expenses are large enough to exceed it.
You also need to factor in your income in your deduction bunching.
If, for example, your earnings were unusually high this year, you might want to put off making medical expense payments until the next one if that will mean a better chance of besting the 7.5 percent of AGI hurdle. Or vice versa if your income was notably lower this year.
While there’s not much time left in 2024 to make major bunching moves, a review now can help you set up a bunching plan for 2025. And getting a better handle on tax deduction bunching is always a good financial New Year resolution.
Tax Turkeys trot this week: As I mentioned in yesterday’s post, the ol’ blog’s Thanksgiving feature of Tax Turkeys to Avoid is this week.
I’m posting five Tax Turkeys, one each weekday this Thanksgiving week.
In case you missed the first Tax Turkey to Avoid, it’s Not reviewing and adjusting if necessary your paycheck withholding.
You also might find these items of interest:
- Tax reform slashed charitable giving by $20 billion a year
- 6 tax donation deduction tips for Giving Tuesday or any day
- Tax-reducing deductions, credits, and income exclusions get inflation bumps in 2025
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