"Bunching" or Itemizing Every Other Year - Tax Savings in Certain Situations!

This is a brief memo regarding itemizing deductions on Schedule A in alternating years. This is commonly referred to as “bunching”.

The concept is to arrange your itemized deductions so that they are all paid in one year. Thus one year you would have enough to surpass the standard deduction threshold and in the following year you would have none or only minimal amounts. Therefore, one year you itemize and the next year you utilize the standard deduction!

The best time in your life to do this is either before you buy a home or after your mortgage is paid off. Interest is generally paid monthly and, therefore, it is difficult to arrange this technique when you have a large mortgage outstanding, but in some cases it may still apply!

Most taxpayers are familiar with doing this with their real estate taxes. However, they are not aware you can also do the same thing with donations and even with Wisconsin income taxes!

You need to look at your situation and the amounts and types of deductions. As long as the time value of money is surpassed and there are no other tax implications (although you may loose the WI Real Estate Tax Credit of a maximum $300), this idea should save tax dollars every other year! It is particularly valuable when your income is going to take a noticeable down turn in the next year.

Wisconsin Department of Revenue has devised an estimated tax form for this specific use! When the state receives it, they will send you a letter confirming their acceptance. Take this letter to your employer(s) and they should stop withholding Wisconsin income taxes on your paychecks in that next year! That’s right! Your net check will go up by the amount of the Wisconsin withholding which you’ve already paid in advance. This means effectively, you’ve prepaid it by less than a year and increases the available cash in the next year from your paycheck. Put the extra money to work for you, don’t get used to spending it. The next year your employer will start withholding again!

Although this methodology is relatively simple when learned, it is still best to seek competent professional help to help you fully utilize the tax savings possible. A competent professional may also see problems with utilizing this technique you did not foresee.

Put your social security numbers and “Form 1ES Year 2011” on the check in the memo field. You must mail it prior to December 31 to qualify the deduction for this year’s return. Also, mail it early enough to get the letter to take to your employer before the first pay day after 1/1.

When you use this technique (“bunching”) you want to prepay as much of your itemized deduction items as possible. Basically, you want to remove any deductions in the year you do not want to itemize. The types or deductions would include real estate taxes, WI estimated income taxes, charitable donations, medical expenses, employee business expenses, etc.

Often, clients will prepay a portion of the donations they intended to make next year in December and then pay the balance in January a year from this coming January. Since most charities use a June 30 fiscal year, the donation still falls in the proper budget year and you get the advantage of maximizing your deductions and minimizing your taxes! Render unto Caesar only what is Caesar’s! A note with the check could explain that you are making the payments in this manner for tax reasons.