Maximize Your Itemized Deductions With These Tips
Individual taxpayers in the United States are given the choice to take either the itemized deduction or the standard deduction. The standard deduction is a fixed amount determined by the IRS based upon filing status and adjusted for inflation each year. The itemized deduction allows taxpayers to combine and deduct various expenses from adjusted gross income to arrive at taxable income.
Eligible itemized expenses include certain medical and dental expenses, taxes paid, home mortgage points, charitable contributions, and an assortment of miscellaneous expenses. Some of the miscellaneous expenses include tax preparation fees, safe deposit box fees, investment fees, and job hunting expenses. For the entire list of deductible miscellaneous expenses refer to IRS Publication 529.
But here’s the catch! In order to itemize in some of these categories, certain thresholds must be met. For example, medical expenses must exceed 10% of AGI and miscellaneous expenses must exceed 2% of AGI. The solution to maximizing your deduction in any given year is to implement the bunching strategy. For instance, assume your adjusted gross income is $50,000 in the current year and will be the same in the following year. If your medical expenses total $5,000 year- to-date, you will not be eligible to claim any portion of your medical deduction because it does not exceed the 10% threshold. By either accelerating or deferring medical expenses, every dollar either accelerated or postponed will provide you with benefit. The goal is to bunch as much of your expenses into one year to push you over the threshold.
So let’s say you know you are going to need new glasses next year, buy them in December of this year. Assuming your new glasses cost $400, you have now accumulated total medical expenses of $5,400 which pushes you over the 10% threshold. By bunching these expenses into this year, you are now able to claim that $400 as a deduction. Deferring expenses works the opposite way. For example, if you have a big surgery scheduled next year, try to push your medical expenses into the following year. The same concept can be applied to other categories subject to threshold limitations. In conclusion, the bunching strategy allows taxpayers to maximize their itemized deductions and thus minimize taxable income.