Authored By Andrew McCue
Contact 847.441.8800
Email: amccue@weisscpa.com

Tax Reform, the New Standard Deduction and Bunching

If you are starting to think that itemized deductions on your personal return are a thing of the past after tax reform, think again. If you would like to increase your tax savings in future years beyond the standard deduction, you may want to consider, “bunching”. Tax professionals have been recommending bunching for years; given the recent changes in the tax code, bunching may make more sense than ever.

The Tax Cuts and Jobs Act enacted a new standard deduction (which nearly doubles to $12,000 for singles and $24,000 for married filing jointly). With the standard deduction increase many personal exemptions were eliminated. These conditions will likely cause fewer taxpayers to itemize their return.  However, bunching (real estate tax payments, charitable donations, medical bills etc.) is a strategy to combine your payments from 2 years into one year to maximize your deduction.

Many in Illinois may have already taken advantage of this concept for tax year 2017 by prepaying their first installment or full year property taxes, with the thought that they would not reach the $12,000 or $24,000 itemizing threshold for the 2018 tax year. This is likely true for most taxpayers, however, there is no reason this cannot be done again for the 2019 tax year in addition to a few other items.

Scenario 1 – Without Bunching

Consider a single individual living in Lake County, with a small house, who gives some money to his church every Sunday. Below is an outline of this taxpayer’s potential deductions.

2019 2020 2021
Mortgage Interest

$3,000

$3,000

$3,000

RE Taxes

$6,000

$6,000

$6,000

Charitable Deductions

$2,500

$2,500

$2,500

Total

$11,500

$11,500

$11,500

Standard Single

$12,000

$12,000

$12,000

$36,000 in deductions

 

For this individual, over the next three tax years, it is unlikely they will have expenses more than the standard deduction and therefore will use the $12,000 every year.

Scenario 2 – Bunching

The same taxpayer from our example above, decides to use a bunching tax strategy instead of simply taking the standard deduction. Lake County allows you to prepay your real estate taxes up to last year’s full year amount paid. And unless your church is struggling for funds, they likely won’t mind if you double your donations one year and skip another. Below is an outline of the taxpayer’s potential deductions.

2019 2020 2021
Mortgage Interest

$3,000

$3,000

$3,000

RE Taxes

$10,000

$0

$10,000

Charitable Deductions

$5,000

$0

$5,000

Total

$18,000

$3,000

$18,000

Standard Single

$12,000

$12,000

$12,000

Your Election

$18,000

$12,000

$18,000

$40,000 in deductions

 

By prepaying their real estate taxes and accelerating/decelerating their charitable donations, this taxpayer is able to get over the standard deduction for two of the next three years. Remember, the taxpayer still gets to take the standard deduction in 2020, even though their expenses only amounted to $3,000. In this modest example, by using tax planning in this way, this taxpayer increased their deductions over three years by $4,000, without paying anything more than they would have over the course of all three years.

In this scenario you will likely be paying this money one way or another, so why not benefit by employing a tax saving strategy? Obviously your own deductions will make a large impact on the potential savings, so take our modest tax savings in this example with a grain of salt.  If you are interested in taking a more strategic planning approach for future tax years, this is not something you’ll want to wait until March of 2019 to discuss with your tax professional. Schedule time after the tax deadline to see if there are opportunities available to you.


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