Tax Strategy: Bunching Itemized Deductions

Under the Tax Cuts and Jobs Act of 2017, an old strategy of “bunching” itemized deductions is new again.

In the past (as recently as 2017), particularly in Texas, some people regularly paid two years of property taxes (“bunching” the two years’ worth of deductions) in Year One and itemized their personal deductions in Year One. In Year Two, they used the standard deduction. They repeated this process in the next two-year cycle. Under the right circumstances, this reduced total income taxes over the two-year cycles.

This strategy may still work, possibly to a lesser extent, for some individuals and their property taxes. Howerver, it will not be effective for many people. The total state and local tax itemized deduction is limited to $10,000 each year beginning in 2018. Also, certain other itemized deductions are eliminated permanently in 2018 or suspended in 2018 through 2025. (Note: On the bright side, the overall itemized deduction phase-down or “Pease Limitation” is suspended through 2025.)

Nevertheless, for people making substantial charitable contributions, bunching those contributions may be very tax-beneficial. This phenomenon is due, in part, to the increase in the standard deduction. The standard deduction has almost doubled for taxpayers. For example, at the top of the range, a married couple, both 65 years of age or older, can claim a standard deduction of $26,600 in 2018.

How does this strategy work? Well, there are several variations on the theme, but here is a pretty good way to bunch your charitable contributions:
Establish a donor advised fund (DAF) with a public charity. Many securities firms have established public charities to “host” DAFs of their customers. Some more traditional charities also host DAFs.
In Year One make your contributions for Year One to the charities of your choice. Also, in Year One make your charitable contributions for Year Two to the DAF. Thus, in Year One you funded and deducted two years of contributions.
In Year Two, make distributions to the charities of your choice from your DAF. (You don’t get a deduction for the DAF distributions. You already got that deduction in Year One.) Repeat the two-year cycle starting in Year Three.

Does this work for everybody? No. Is it as simple as it seems? Not quite. Will it work for you? Maybe. With some input from you, we can make some calculations and give you a pretty good idea if bunching will help you in 2018.