Bunching Deductible Expenses This Year Can Ensure Greater Tax Savings for YouPosted December 2023
American tax laws give taxpayers the option to either keep track of their deductible expenses or use a standard deduction to determine their federal taxable income each year. A majority of taxpayers opt to use the standard deduction because the total of their deductible items is less than the amount of the standard deduction.
However, many of our savvy, charitably minded donors employ a strategy of “bunching” some of their deductible charitable contributions into a single year intermittently instead of incurring them evenly over multiple years. The object of this strategy is to give them enough deductions in the years that they “bunch” to justify itemizing. Doing so enables them to realize more tax savings than they would have had using the standard deduction.
Donors who use this strategy may pursue options like prepaying property taxes, purchasing new hearing aids or glasses, or accelerating the timing on elective surgeries to increase deductible expenses. Charitable contributions are arguably the most flexible deduction available to bunch because you have total control over how much you give and when you give it.
Example: Assume you make $10,000 of charitable contributions annually, but the total of your deductions falls about $500 short of the standard deduction you can take. If you accelerate the contributions planned for 2024 and give them this year, your itemized deductions will exceed the standard deduction by about $9,500—saving you as much as $3,515 in federal income tax, depending on your marginal tax bracket. Next year, you will pay no additional tax even though you skip the contributions because you will use the standard deduction.
Bunching deductions may be even more attractive this year. Why? The IRS, due to higher inflation, increased the standard deduction more than usual for 2023 and is doing so again for 2024—potentially creating a bigger gap between the total of your itemized deductions and the standard deduction. If you have the same amount in deductions next year, you will have a bigger hill to climb to exceed the amount of the standard deduction. And that would decrease the tax savings you gain by bunching the deductions compared to bunching those deductions this year.
Have questions about planning the timing of a charitable gift to support our mission? Contact our office to arrange a confidential, no-obligations discussion about your options.
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