A year and a half ago we posted a blog about bunching. Simply, bunching is when you arrange paying for things so that you can “bunch” together enough tax deductions into a single year to make using the itemized deduction worthwhile.
For tax year 2018 though, the Standard Deductions are going up to $12,000 from $6,350, which is an absolutely huuuuge jump. In fact, the Tax Research Institute has said that it expects the number of people taking itemized donations to drop by more than half for 2018. According to numbers released by H&R Block, that means a drop from 30% of filers to 15% of filers.
This means that bunching is much more important to many more people, but the threshold that you have to get over is nearly twice as high. Welcome to SUPER BUNCHING!
Super bunching is a lot like regular bunching, but since it’s bigger and there are new rules, it’s SUPER now! And yes, that means this is going to be a long complicated post to try to explain what’s going on.
First thing, the new limits. In addition to changing the standard deduction to $12,000, the Tax Cuts and Jobs Act of 2017 added new restrictions on how you get over the $12,000 hurdle:
- The SALT cap: You’ve probably heard about this one in the news, there is now a cap on the SALT (State and Local Taxes) deduction of $10,000. Before this, you could deduct the amount of state and local taxes you paid on your federal taxes, and if you lived in a place with high taxes (say, New York City or San Francisco) that could be a great big deduction from your federal taxes. If this was your primary way to get to itemized, you’ll notice that you can’t even just get to the $12,000 bar just by state and local taxes. And that includes real estate taxes, by the way.
- Mortgage interest deduction limits: This is a complicated deduction, and the change to the limitation is relatively minor. So you can deduct the interest on a home mortgage or home equity loan. If you take out a loan for $500,000 and your monthly payment is $2800, some portion of that payment is interest on the loan (the bank would figure it out for you). Before the new tax reform bill there was already a limitation capping the interest you could deduct to the first 1 million dollars of your home loan and the new limitation is now $750,000. Good news though, if you had a mortgage that was already in place before December 15, 2017 that was between $750,000 and $1,000,000, your deduction doesn’t change. The new rule applies only for new loans going forward. One other thing: if you take out a home equity loan, the interest is only deductible if the money is used for the property itself.
- Miscellaneous deductions: So there are a couple of changes to miscellaneous deductions but since they all go into the same box on the 1040 Schedule A form, we’re grouping them all together. First, unreimbursed employee expenses are going away (if you fill out a form 2106 you’re probably familiar with these). Second, tax preparation fees will no longer be deductible (which should make it clear that accountants, as a group, wield very little power). Third, all “miscellaneous itemized deductions subject to the 2% floor” have been repealed for 8 years. That’s actually quite a lot, including gambling losses, safe deposit boxes, and investment expenses. This could be a surprisingly big one for a lot of people.
On the other hand, there are a couple of improvements on previous limitations that we’ll address.
So, remember, the premise of bunching is to take a couple years of allowed deductions and pile all of those into one year. That way, you get the itemized deduction one year and the standard the next, to maximize your deductions in both years. There are a bunch of deductions though and it can be really difficult to manipulate when some of them occur. We’ll talk about that in relation to specific deductions as we walk through the various groups.
Starting at the top of the (2017) Schedule A:
- Medical Deductions: Medical deductions were subject to a “floor” of your AGI, which means you used to take 10% of your Adjusted Gross Income and subtract it from your medical expenses, and if there was anything left over you got a deduction for that amount. In the last few years, the percentage of that floor has been lowered to 7.5% and now that will continue through 2018 (so, the taxes that you’ll file in 2019). If you’re older than 64 years old after that, that 7.5% rate will continue for you and will go back up to 10% for everyone else.
- Super Bunching Hints: If you have something serious happen, you may end up with considerable medical bills (and related bills, we can tell you specifically what is deductible or not) that will put you over the floor. A year where this happens might be a good year to try to bunch your deductions into, since you already have an unexpected medical deduction. In the non-bunching year, you may want to delay any procedures that you can until after the year ends.
- State and Local Taxes (SALT): You have to pick one, state and local income taxes or state and local sales tax (there are some websites, including the IRS, that can help you figure out the general sales tax amount) and then you add your real estate taxes to that (and personal property, if you have those where you live).
- Super Bunching Hints: Since you probably aren’t going to be moving year to year, you don’t have much control over your real estate taxes, and the IRS doesn’t allow you to pay them until they’ve been assessed either. You may have the option to prepay other state and local taxes though. Doing that could bump up your deductions, but remember you can’t go over $10,000 in this category now.
- Interest Paid (Mortgage): Unfortunately, due to the large amounts and complexity, it’s almost impossible to manipulate when you pay interest on your mortgage. The only point to consider here are home equity loans (HELOC), which as mentioned above, are only deductible if they’re for home improvements or expansions. So plan when you do your remodeling accordingly.
- Charity: For extremely wealthy people, the limits on charitable donations were actually relaxed in the Tax Cuts and Jobs Act of 2017 and you can now deduct up to 60% of your AGI in charitable donations before you hit the cap. Although that doesn’t help most people, this is still the category where you’ll find the most flexible deductions.
- Super Bunching Hints: Quite a bit of charitable contributions goes to churches, and they’re definitely not going to be happy to hear that they’re not going to get much out of you in your non-bunched year, so talk it out with them and make sure they can feel that you’re good for the extra in your bunching year. You may think about it the same way for school and alumni donations.
- Casualty and Theft Losses: Unfortunately, this section is nearly wiped away by the Tax Cuts and Jobs Act of 2017 except for losses sustained in a federally declared disaster area. Additionally, there’s a floor of 10% of AGI before you can start taking deductions here. This section isn’t going to help many people at all unless there are terrible disasters (which hopefully won’t happen).
- Job Expenses and Miscellaneous: This last category is also a victim of the TCJA, almost everything in this category except for reimbursed expenses on your form 2106 are going away. That means that our favorite deduction, tax preparation fees, is now gone. It’s also a big hit for people that make money investing, since this section also includes investment fees. Also, gambling losses are no longer deductible, so if you live near a bunch of casinos like we do here in Albuquerque you should be careful about that (our advice: you should only win at casinos).
As you can see, the charitable deductions section is now even more essential in planning your bunching because of the limits placed on other sections.
You may want to take a look at your tax return for the previous years. If you had deductions near $12,000 (if you file Single) or $24,000 (for people that are married filing jointly) you may want to come in and talk with us to see if there is anything we can do to help you figure out your best options. This summer/fall time is the best time to come in and see us because there’s still time left to make substantial changes.
If you’re planning on bunching, best of luck to you! May the deductions be ever in your favor!