Bunching Tax Deductions to Meet the Threshold for Itemizing
If you don't meet the threshold for itemizing, consider these strategies for timing expenses to increase your deductions.
Every year you must decide whether you will take the standard deduction on your income taxes or itemize your personal deductions. Obviously, you should itemize only if your total itemized deductions for the year are more than the applicable standard deduction. If you don't have enough itemized deductions to itemize, you lose those deductions forever--you can't save them up and use them in a later year. Check the IRS website for the current standard deduction amounts.
If you don’t have enough itemized deductions to itemize every year, consider bunching your itemized deductions. This means that you pile on your itemized deductions every other year, giving yourself the maximum itemized deduction for that year. You then take the standard deduction in the alternate years, when you have fewer itemized deductions. During the year you plan to itemize, do everything you can to make your itemized deductions exceed your standard deduction. Pay every bill that will result in an itemized deduction.
You particularly want to bunch expenses for those itemized deductions that are subject to a threshold amount--that is, are not deductible until they exceed a specific percentage of your adjusted gross income (AGI). For example, medical expenses are not deductible until they exceed 10% of your AGI. Most miscellaneous itemized deductions--the charitable deduction and unreimbursed employee expense deduction--are subject to a 2% of AGI threshold. By bunching these deductions into a single year you don’t have to struggle to satisfy these threshold amounts.
If you want to try to increase your itemized deductions to get above the standard deduction rate for the year, here are some ways to bring expenses into the current year.
You could contribute double what you ordinarily do and donate nothing the following year.
If you own a home, pay the next year’s property taxes before the end of the current year.
State income taxes
If you pay your state income taxes by paying estimated tax four times per year, you ordinarily make your fourth payment for the current year in January of the following year. Make this payment in December instead of January so you can deduct it this year.
If you or a family member need to have elective surgery or an expensive dental procedure like orthodontia, have it this year. Stock up on prescription medications, get new eyeglasses. If your doctor has advised you to make home improvements to safeguard your health—for example, installing an air filtration system to protect from allergies—make them this year.
If you’ve been thinking about spending money on any employee expenses that won’t be reimbursed by your employer—for example, subscriptions to work-related publications, professional or union dues, or education expenses—this would be the year in which to do it.
If you need to buy things for your investment activities, do it this year. For example, renew your subscriptions to investment publications.
If you have a hobby from which you earn money, stock up on things you need for the hobby, and make this your year to go to conferences and the like. Hobby expenses are deductible up to the amount of hobby income. Any expenses that exceed hobby income are not deductible at all. Thus, ideally, in any year you wish to itemize your deductions, your annual hobby expenses should match your hobby income. For example, a hobby artist who sells two paintings during the year for $1,000 and wants to itemize his deductions for the year, should have $1,000 in art expenses he can deduct. If you don’t itemize, no hobby expenses are deductible, so try to spend as little as possible in any year you take the standard deduction.
Take a gambling vacation
If you like to gamble and you’ve won more than you’ve lost during the year, take a gambling vacation. If you lose no more than your total winnings for the year, your losses will be made up by your tax savings since they’re deductible against your gambling winnings. If you don’t lose, you won’t save on taxes, but you’ll have even more winnings. Either way, you’re ahead.
Note: Under the American Taxpayer Relief Act, there was one provision (the so-called "Pease Provision") that limits the amount of itemized deductions that high income taxpayers can claim. Certain limitations on claiming deductions kick in for taxpayers with AGI levels above $300,000 for joint filers and $250,000 for individuals.