The following is an excerpt from my book More Than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need.
A common tax planning strategy is to “bunch” itemized deductions into a given year. The idea is to rack up a whole bunch of itemized deductions in one year, and then in the next few years have little to no itemized deductions—and therefore take the standard deduction in those years—then repeat the process every few years.
EXAMPLE: Isra and Ben are married. They normally contribute approximately $10,000 to charity each year. And they pay at least $10,000 of state income tax each year (i.e., the maximum deductible amount of state taxes). They have no other itemized deductions.
In such a situation, Isra and Ben gain no value from their itemized deductions at all, because they total $20,000, which is less than the standard deduction for a married couple who file jointly ($27,700 in 2023).
After Isra and Ben learn about deduction bunching, they adjust their approach. Instead of donating $10,000 each year, they donate $50,000 every fifth year. This way, they can take $60,000 of itemized deductions in that year (i.e., their charitable contributions plus $10,000 of state income tax), and they can still use the standard deduction in the other four years.
An important point to note when bunching donations is that your itemized deduction for charitable contributions in a given year can be limited to certain percentages of your income, depending on what type of property you are donating and what type of organization you’re donating to. (See IRS Publication 526 for more details.)
It’s not as easy to control the timing of other itemized deductions, but the concept applies to them as well. For instance, medical expenses are usually only deductible if they exceed 7.5% of your adjusted gross income. Bunching medical expenses into a given year may make it easier to exceed that threshold, which would be especially useful if it’s in the same year in which you make the every-several-years donation. (Bunching medical expenses often makes sense anyway, when possible, given the way that insurance deductibles and out-of-pocket maximums work.)
Simple Summary
- By “bunching” itemized deductions into certain years, you may be able to actually get some tax savings from them, when you would otherwise just claim the standard deduction every year.
- One of the easiest ways to bunch itemized deductions is by bunching donations to charity (e.g., making one large donation every several years or every few years, rather than smaller donations every year).