by Jonathan Thiel
Can you itemize, or will you be claiming your new standard deduction? Once you understand the levers available, you’ll know which among them you can pull when it comes to paying Uncle Sam.
For one, you may be able to maximize your personal deduction through bunching. It’s a great way to ensure that your deductions will exceed the new standard deduction thresholds and is especially beneficial in a year in which you know that you will have a higher than normal income.
Let’s say you were expecting to sell a business or investments. In that case, you might expect that your income would be substantially higher than in other years. Bunching is the idea that you would attempt to soothe some of the sting by considering the timing of controllable expenses, such as:
Example: Assume Mr. and Mrs. Smith have adjusted gross income of $140,000 annually. They pay annual medical expenses of $13,000, make annual donations of $20,000 to their favorite charities, and pay taxes of $3,000 per year.
Figure 1. An example of no bunching.
Now assume the Smiths will receive additional investment income of $20,000 in 2019 and 2021. By bunching, they are going to reallocate some of their medical expenses and donations to those years.
Figure 2: What can bunching do for you? (or the Smiths?)
Standard and Itemized Deductions prior to TCJA and after the TCJA were changed like this:
Major changes to Itemized deductions include:
If you have questions about your itemized deduction limits or are in need of other corporate tax planning and compliance, multi-state taxation, international tax, or tax research services, reach out to Redpath’s Gloria McDonnell, Partner, and Tax Operations Director today.
Gloria McDonnell is the tax operations director and serves on the leadership team at Redpath and Company. She specializes in corporate and individual tax planning and compliance, multi-state taxation, international tax, and tax research. Gloria works with closely-held businesses in a variety of industries, and has provided business tax accounting services since 1989, and has been at Redpath and Company since 1991.More posts by Gloria McDonnell
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