Tax Deduction Best Practices

Are you making the best use of your tax-deductible expenses? A married couple filing jointly gets a standard deduction of $29,200, and most households do not itemize their deductions. If you are one of the few who has itemized deductions close to the standard amount, you might greatly benefit from additional tax planning.

One approach we often use for our clients is called bunching deductions. When utilizing this strategy, we consider and plan your tax situation two years at a time. In one year, we pay and take as many itemized deductions as possible. In the subsequent year, we choose to take the standard deduction. This approach benefits you by maximizing the allowable itemized deductions.

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

Medical expenses: We realize that most medical expenses are not planned; however, if you have been putting off costly prescription purchases or elective surgery, it would be wise to try and group those items in the same year. (The medical expense deduction is the amount that exceeds 7.5% of your AGI.)

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: The deduction for state and local taxes is capped at $10,000.)

Charitable contributions: This may be the most practical way to bunch your deductions. Provided you donate regularly to a charity and have appreciated assets held in a taxable account, it is often most advantageous to make all of your donations for two years in your designated itemized deduction year. The most common objection to this strategy is that you want the charity to receive your contribution every month, as usual. Still, there is a solution to this problem – a donor-advised fund (DAF). A DAF allows you to donate the appreciated assets all in one year and then direct the funds to your favorite charities on a time frame of your choice.

In this way, you can take your larger itemized charitable gift deduction in the year that the gift of appreciated assets is made to the DAF. The charity will never know your gifting strategy is different, but you will be able to utilize your deductions as efficiently as possible.

Assigning a tax purpose to each year enables us to plan in a way that lets you take maximum advantage of all of the tax relief within the current tax code. We are always looking for effective strategies to implement into your financial plan to help you achieve your goals, so give us a call to discuss tax planning details!

-Kristiana Daniels, CFP®, EA, BFA™

Wealth Advisor