In this week’s post, we will elaborate on a concept that can help anyone with their tax planning before the end of the year.
IRS allows you to decide every year whether you take the standard deduction or itemize deductions. Your tax preparer will choose the highest to reduce your taxable income. To briefly touch on the difference of taking a standard deduction or itemized deduction, standard deduction is an allowable amount given by the IRS and itemized deductions are eligible expenses that taxpayers can claim (in lieu of the standard deduction). Most taxpayers fall short of taking advantage of itemized deductions because they cannot accumulate enough expenses to exceed the standard deduction.
To avoid losing you, I won’t list all the expenses that can be classified as itemized deduction but you may visit the link below:
How bunching works:
Bunching only works every other year due to the underlying idea of incurring two years’ payments of allowable deductions in one year and taking the standard deduction the following year. In simple math, let’s say you have enough expenses to come short or barely arrive to the same amount as the standard deduction in any given year and, as a result, you always take the standard deduction. Bunching will allow you to increase your itemized deductions to exceed the amount of the standard deduction one year and still allows you the standard deduction the following year – when you are not reporting the deduction you doubled the previous year. Confused yet? please bear with me.
As an example, in Bexar County, January 31 is the last day to pay property taxes before they are considered delinquent. This provides the opportunity to pay your taxes in December or January without a penalty. This is important because you may pay this year’s property taxes in January and you can double up on property tax payments if you pay 2017 taxes in December of next year. By doing this, you will use standard deduction the first year you implement this strategy (because you paid your taxes the following year) and you increase your itemized deductions the following year (because you made two payments – one in January and the other in December). Keep in mind that you can do the same for other expense categories such as charitable contributions, especially when you contribute a certain amount per year. Some of these charitable organizations have fiscal years that do not end on December 31. Through some planning, you may double up your contributions one year and skip the following, however, the organization will record a donation each of their fiscal years when timed right.
The following links provide more details with illustrative examples:
Please remember that while bunching expenses may be a worthwhile strategy, each case is different and certain expense categories are only deductible to the extend they exceed certain thresholds.
Lastly, be PROACTIVE with your taxes and keep your CPA in the loop in order obtain strategic tax planning advice throughout the year.
Juan M. Caballero
"You can get most things you want in life. It's just that most goals will take one or two years longer than expected. Be patient." - Tai Lopez
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