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‘Deduction Bunching’ – A Tax Strategy That Works And Makes You Sound Smart

In Articles, Tax Planning, Weekly Articles by Adam Cufr

With the passing of the new tax law, accountants have become the new rock stars. All eyes are on those with tax knowledge to sort it all out and show the way to the tax minimization promise land. While much is still to be learned about the myriad changes, I thought you might enjoy learning about just one strategy. Not only can it save you money while doing good in your community, but knowing this concept will make you the life of any party. Just imagine holding a glass of Pinot Grigio at your next party and asking the group, “I assume you’re all deduction bunching, right?” You now own that conversation.

Before putting yourself out there, let’s decide what that sentence actually means, okay? The new tax law roughly doubles the standard deduction to $12,000 for individuals and $24,000 for couples. This change means many fewer people will need to or be able to itemize their deductions. For example, giving to your church and other charities may not directly benefit you from a tax perspective like it has in the past. Bummer. Sure, you’re still receiving the lower tax bill from the higher standard deduction, but it’s nice to also benefit from your giving. So what to do?

Enter deduction bunching. Using this strategy, you’d effectively give two years’ charitable giving in one year, allowing you to itemize (assuming you exceed the standard deduction), then simply use the standard deduction the following year. By alternating between the two, bunching your deductions in a single year, you’re more likely to benefit from the giving you’d do anyway, while also enjoying the higher standard deduction. It’s a win-win!  Of course, you need to discuss this with your accountant or tax preparer to ensure it’s done correctly. I also suggest mentioning this to your church finance person so they can plan accordingly for your lumpy giving, especially if you attend a smaller church.

It’s amazing how tax law can create so many beneficial results and unintended consequences all at the same time. With a raised standard deduction, one of the goals was to simplify tax filing for many Americans, yet here we are discussing an alternating-years tax strategy that does nothing to simplify your tax life. But for those who enjoy the strategizing and potential tax savings of such a thing as deduction bunching, this is your cue to have a conversation with your tax professional.

So go out and be the life of the party. Tell your fellow party-goers that they may be missing an opportunity to deduction bunch, and watch your new Facebook friend requests roll in. Hurry though, before the word gets out and everybody is in the know. Please remember to drink – and bunch – responsibly.

All the best,

Adam Cufr Signature

Adam Cufr, RICP®

About 

Adam Cufr, RICP® (Retirement Income Certified Professional®) is a financial advisor and founding principal of Fourth Dimension Financial Group, LLC providing personal finance and retirement planning services. Adam is a Columnist for Retirement Advisor Magazine. He is also a sought-after media commentator and thought leader. Adam was named one of The 20 Most Creative People In Insurance in 2015 and is a columnist for Retirement Advisor Magazine and the author of Off the Record – Secrets to Building a Successful Retirement and a Lasting Legacy.

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