Itemized Deductions: How “Bunching” Unlocks Thousands in Tax Savings
Itemized Deductions: How “Bunching” Unlocks Thousands in Tax Savings
COACHING POINTS
- The Problem: The Standard Deduction is high (approx. $30,000 for married couples in 2025). If your itemized deductions (Mortgage Interest + SALT + Charity) total $28,000, you get zero tax benefit for them because you are forced to take the Standard Deduction anyway.
- The Solution: “Bunching” is the strategy of combining multiple years of expenses (especially charitable giving) into a single tax year to forcefully exceed the Standard Deduction threshold.
- The Strategy: By itemizing heavily in Year 1 and taking the Standard Deduction in Year 2, you “double dip” the tax code, legally maximizing your write-offs over a multi-year period.
Since the Tax Cuts and Jobs Act (TCJA) doubled the Standard Deduction, millions of taxpayers stopped itemizing. This simplified filing, but it effectively eliminated the tax incentive for charitable giving and mortgage interest for many upper-middle-class families. “Bunching” is the tax engineer’s answer. It stops the “use it or lose it” waste of deductions that fall just below the line. Source: IRS Schedule A Instructions / TCJA Provisions
Scenario: Married Couple. Standard Deduction = $30,000. Their annual potential itemized deductions are $25,000 (Charity + SALT + Mortgage).
- Standard Approach (No Bunching):
Year 1: Deductions $25k. (Take Standard $30k).
Year 2: Deductions $25k. (Take Standard $30k).
Total 2-Year Deduction: $60,000. (The $50k of actual expenses provided no benefit). - Bunching Strategy:
Year 1: Accelerate Year 2’s charity/taxes into Year 1. Total = $50,000.
Year 2: Deductions drop to $0. (Take Standard $30k).
Total 2-Year Deduction: $80,000. - Result: By shifting the timing, the couple created an extra $20,000 in tax deductions out of thin air.
What-If Scenario: Donor-Advised Funds (DAF)
Comparison: Giving $10k/year vs. Bunching $50k into a DAF every 5 years.
| Giving Strategy | Tax Benefit | Impact |
|---|---|---|
| Annual Giving ($10k) | None (Swallowed by Standard Deduction) | Inefficient |
| Bunching ($50k via DAF) | Massive (Spikes way above the line) | Optimized |
Total Deductions (2-Year Period)
| Strategy | Total Amount Deducted ($) |
|---|---|
| Standard Filing | 60000 |
| Bunching Strategy | 80000 |
*Same actual spending, but different timing results in a $20,000 larger tax shield.
The “Standard” Hurdle (2025 Est)
| Filing Status | Standard Deduction ($) |
|---|---|
| Single | 15000 |
| Married Jointly | 30000 |
*If your mortgage interest, taxes (SALT cap $10k), and charity don’t exceed these bars, “Bunching” is your only way to get credit for them.
Execution Protocol
Look at your last tax return. Did you take the Standard Deduction? If yes, calculate what your Itemized Deductions would have been. If they are close to the limit (e.g., within $5k), you are a perfect candidate for bunching.
You cannot move Mortgage Interest (fixed schedule) easily. However, you can move:
1. Charitable Giving: Give 5 years’ worth at once via a DAF.
2. Property Taxes: Pay your Q4 tax bill in January (Year 2) or prepay it in December (Year 1) to shift the deduction.
3. Medical Expenses: Schedule elective surgeries in the “Bunching Year” to exceed the 7.5% AGI floor.
Create a calendar.
Even Years (Itemize): Prepay taxes, max out DAF, pay major medical.
Odd Years (Standard): Pay nothing extra, take the free Standard Deduction.
COACHING DIRECTIVE
- Do This: Combine Bunching with a high-income year (e.g., a year you sell a business or get a big bonus). The deductions are worth more when your marginal tax rate is higher.
- Avoid This: Bunching if you are subject to AMT (Alternative Minimum Tax). The AMT disallows certain itemized deductions (like SALT), which could negate the entire strategy. Check with a CPA.
Frequently Asked Questions
Can I prepay my mortgage?
Generally, no. The IRS only allows you to deduct interest that has accrued. You cannot prepay 12 months of interest in December to get a deduction. Only the January payment (made in Dec) typically counts.
What is the SALT Cap?
The State and Local Tax (SALT) deduction is currently capped at $10,000 per year. This severely limits the ability to bunch property taxes and state income taxes, making Charitable Giving the primary lever for this strategy.
Does this affect the Medical Expense floor?
Yes. Medical expenses are only deductible if they exceed 7.5% of your AGI. By bunching multiple procedures (e.g., dental implants, lasik) into one year, you are more likely to hurdle that 7.5% floor.