Don't Mess With Taxes

Reviewed and updated Friday, Dec. 8, 2023

When are tax-deductible expenses like bananas? When you bunch them. (Photo by Couleur)

I just got an email from my dentist, who's suddenly turned into an ad hoc tax adviser.

He wanted me to know that he's got a few appointments open through the end of the year in case I need to spend my medical flexible spending account money.

His alert also got me thinking about another tax tactic, bunching.

Types and timing of deductible expenses: Since enactment of the Tax Reform Act of 2017, year-end bunching has taken on increased importance.

This potential tax saving technique means 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.

That gathering of Schedule A tax breaks is more critical thanks to the tax reform law's dramatic increases to standard deduction amounts and new limitations on some popular itemized claims.

Your goal is to get an itemized total that is more than your standard amount. You might be able to do so by making deductible moves by Dec. 31. These include —

• Making allowable medical payments to get you past the 7.5 percent of your adjusted gross income (AGI) deduction threshold;
• Paying your January mortgage this month so you can count the interest amount; Remitting your property tax payment early so that you can claim the maximum $10,000 deduction limit on state or local income or property taxes; and
• Donating to Internal Revenue Service approved nonprofits.

Medical, charitable year-end moves: Your dentist or doctor might not be as tax minded as mine. But he's right. Most people who itemize do so because they have substantial medical or dental expenses.

And charitable giving is always a good bunching move, since these deductible gifts are entirely at your discretion. You can donate up to 60 percent of your AGI.

So if, for example, you normally make large year-end gifts to your favorite charity, double it by Dec. 31 if it will put your itemized amount over the standard claim. Or, conversely, push it to early January to make the most of the gift on next year's Schedule A.

Alternating itemized, standard claims: That push or pull from the current tax year to the next is another bunching advantage.

For example, if your philanthropic and other deductions help push you beyond your standard deduction, great.

If however, you fall short, then take the standard deduction with this year's tax filing and move — aka bunch — payment of your itemized expenses into the new tax year.

This alternating standard deduction claim in one year and itemizing in the next is a multiyear tax strategy that helps you get the most out of your deductible expenses and the tax code.

Deduction amounts matter: Of course, you need to keep track of what the standard deduction amount is each tax year. Those 2023 and 2024 amounts, as noted in Part 2 of the ol' blog's annual inflation adjustments series, are —

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 where you'll have a better chance of besting the 7.5 percent of AGI hurdle. Or vice versa if your income was notably lower this year.

Switching year to year is OK: And don't worry about IRS deduction rules. There aren't any when it comes to choosing which deduction method you want to use.

We taxpayers can decide every filing season whether we want to take the standard amount or gather our receipts and fill in Schedule A. We can claim the standard amount for five years in a row and then, bam, if we have a lot medical bills the next year, itemize.

Yes, I know, there's not much time left to make bunching moves in 2023. But if you look at your bunching options, you might find ways to make it the potentially tax-saving move work for 2024 if not this year.

And getting a better handle on tax deduction bunching is always a good financial New Year's resolution.

You also might find these items of interest:

• 6 tax donation deduction tips for Giving Tuesday
• Items to add to your year-end medical FSA shopping list
• Medical tax provisions' inflation adjustments could be a tax-cutting Rx

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