With the end of 2022 coming closer and closer every day, you can help reduce your taxable income during the last month of the year with tax planning strategies. We will be posting a series of ideas to consider in order to minimize your tax liability. See the “Related Posts” link at the bottom of this article for more tax planning strategies.
Bunching of Itemized Deductions
Individual taxpayers must choose whether to itemize deductions (expenses that can be used to reduce your taxable income) or take the standard deduction on their income tax returns each year. If the sum of itemized deductions is greater than the standard deduction, it makes sense to itemize. The passage of the TCJA in 2017 greatly increased the standard deduction (for 2022: $12,950 for single filers; $25,900 for married filing jointly), impacting the planning and consideration that is required before making the decision in order to realize tax savings. Click here to read a related post that specifically discusses tax filing decisions strategies for married taxpayers.
One way to maximize the impact of your itemized deductions is a bunching strategy. The most common itemized deductions are for unreimbursed medical expenses, state and local taxes (SALT), residential mortgage interest and charitable contributions. Certain items are deductible only to the extent that they exceed a floor, so it is important to be aware of these thresholds and consider how to “bunch” them to achieve the best tax result. A combination of miscellaneous itemized deductions are only deductible if they exceed 2% of the taxpayer’s AGI (in tax years before 2018 and after 2025), while total qualified unreimbursed medical expenses must exceed 7.5% of AGI for 2022.
If you want to make use of your medical expense deductions by itemizing them, you should decide whether it would be more favorable to try to move appointments you may have during the final days 2022 and reschedule for early 2023. Pushing the appointments to the 2023 tax year may allow you to accumulate more qualified unreimbursed medical expenses over the course of the year, instead of splitting them between two years and possibly missing out on the benefit for both years. You would want to bunch the medical expenses into the year with the lower taxable income to maximize the deduction.
This strategic timing and bunching strategy can also be used with charitable contributions. For example, you may decide to donate more to charity in 2022 in order to maximize the benefit of itemized deductions; then, contribute less in 2023, when you plan to take a standard deduction when you file your return. Click here to read our tax planning strategy post with more tips related to charitable contributions.
As always, our tax professionals are available to help you address your specific situation – please reach out to your GYF executive or contact our office at 412-338-9300 for assistance.
Related Posts
Year-End Tax Planning Strategies for Individuals – Pre-tax and Self-employed Deductions
Year-End Tax Planning Strategies for Individuals – Securities
