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Bunching Deductions and DAFs

Bunching Deductions and DAFs

» Article by Kristiana Daniels, CFP®, Senior Relationship Manager |  Featured in the February 2020 edition of The Rational Optimist™


The year 2018 was the first year with the Tax Cuts and Jobs Act tax rules in action. The results of these new tax rules were impactful for many households, especially when considering the deductions – standard vs. itemized. Fewer people itemized deductions in 2018.

With a standard deduction of $24,000 for a married couple, many people are finding themselves not itemizing their deductions. These new rules have the potential to change your tax planning in a few different ways. It is essential to be as thoughtful as possible with the deductions that qualify as itemized deductions (such as charitable gifts) so that we can make sure you get the biggest bang for your buck.

One approach that is helpful for many people that have itemized deductions that are often close to the standard deduction is the tax planning strategy of Bunching Deductions. When utilizing this strategy, we consider and plan your tax situation two years at a time.

This bunching strategy of alternating between the standard deduction one year and itemizing the next, is designed to maximize the total tax deductions taken over a rolling 2-year period.

In one year, we pay and take as many itemized deductions as possible. In contrast, in the subsequent year, we choose to take the standard deduction, thus maximizing the allowable itemized deduction number for your benefit. This bunching strategy of alternating between the standard deduction one year and itemizing the next, is designed to maximize the total tax deductions taken over a rolling 2-year period.

We are always looking for effective strategies to implement within your financial plan to achieve your goals.

Here are a few common deductions that we can consider when planning to bunch deductions:

Medical Expenses.

We realize that most medical expenses are unplanned, however, if you have been putting off expensive prescription purchases or elective surgery, it would be wise to try and group those items into the same year. As a reminder, the total of your medical expenses that you can deduct is the amount over 10% of your AGI for 2020.

Property Taxes.

If you have the tax bill in hand, you can pay next year’s taxes before the end of the year. In this case, you would be able to claim that amount as a deduction for the current tax year. Note that the cap for the deduction allowed for state and local taxes is $10,000.

The SECURE Act now restricts the amount of time over which distributions must payout to individual beneficiaries to no more than ten years in duration. However, there are still exceptions for spouses, disabled individuals, and individuals not more than ten years younger than the IRA owner.

Charitable Contributions.

This may be the most advantageous way to bunch your deductions. If you regularly give to a charity, it would be most beneficial to give all your donations in one year. The most common objection we hear to this strategy is that you want the charity to receive your gift each month as usual. We have good news for you – you may be interested in a Donor Advised Fund (DAF).

A DAF is an account that you can donate your appreciated assets to all in one year. This account will hold your funds until you decide to grant a specific amount to a charity, allowing you to take the deduction for the charitable gift in the year that the gift of appreciated assets was made.

It still enables you to give funds monthly (or at your discretion) to the charities of your choice. The charity will never know the difference in your gifting strategy, but you will be able to utilize your deductions as efficiently as possible.

By bunching your deductions, we would designate a year to itemize and a year to standardize your deductions. By assigning a tax purpose to each year, we can tax plan to position you as best as possible to take advantage of all the tax relief within the current tax code.

We are always looking for effective strategies to implement within your financial plan to achieve your goals. Give us a call to discuss the details of tax planning within your financial plan.