#MIDDLEBURY
by Mark A. Burns
You may be wondering what the title of this column refers to. The bunching concept will not be applicable for many people, but if you can take advantage of it and miss the opportunity, then you will leave tax savings on the table.
To bunch or bunching means deliberately timing certain payments in order to maximize tax deductions and the resulting tax savings. The most common reason for doing this is if someone is borderline on their tax return regarding having sufficient tax deductions to itemize on Schedule A versus taking the standard deduction.
For example, the standard deduction amount for a married couple filing a 2015 joint tax return was $12,600. Let’s assume that couple has the following annual tax deductions: mortgage interest – $5,000; real estate (RE) taxes – $4,000; State of Connecticut income taxes – $3,000; charitable contributions – $1,000. Those deductions total $13,000 and would be itemized as such.
The total is slightly more than the standard deduction amount of $12,600. But if the RE tax payment due Jan. 1 is made in December, that will result in three tax payments being made in one calendar year (assuming the previous year’s comparable payment was made in January of that same year). So total RE taxes would then be $6,000 in that year, and total deductions that year would grow to $15,000. Then, if you alternated years and made three RE tax payments every other year, in the “between” years, there would only be one payment on July 1 of $2,000.
In the those years, total itemized deductions would be $11,000, but since that is less than the standard deduction of $12,600, you get to take the higher amount. So using this bunching technique, over a two-year span, total deductions would be $27,600 ($15,000 + $12,600) versus only $26,000 ($13,000 each year) if you did not bunch. That is incremental tax deductions of $1,600, or a $400 tax savings if you are in the 25-percent tax bracket.
Now if your RE taxes are higher, you can achieve an even bigger tax savings. You might be able to make the differential even larger by also timing the payment of some of your charitable contributions, any quarterly state estimated tax payments, and your Jan. 1 mortgage payment.
A similar benefit might be achieved if you are affected by the Alternative Minimum Tax in certain years but not others. Since the AMT calculation nullifies the benefit of the deductions for income taxes and RE taxes, staggering these payments so more occur in years you are not in AMT will give you greater incremental tax benefits in those years.
Successfully implementing the above strategies does require some advance planning so always consult a tax professional if you are uncertain about how tax matters might affect you.
Mark A. Burns, M.B.A., is a C.P.A. with Diversified Financial Solutions PC in Southbury. He can be reached at 203-264-3131 or Mark@DFSPC.biz.
