Bunching Deductions Across Years
Photo by Eric Rothermel on Unsplash
TCJA's higher standard deduction means most taxpayers no longer benefit from itemizing year-to-year. But for taxpayers whose potential itemized deductions hover near the standard deduction threshold, alternating between itemizing and taking the standard deduction — "bunching" — can produce better results than either strategy alone. The concept: concentrate deductible expenses in every other year so that itemized deductions exceed the standard deduction threshold in the "bunching year," while taking the standard deduction in the "off year." The most controllable deductible expense for most people is charitable giving, which can be moved forward or backward in time without changing the total amount given. Donor-Advised Funds make bunching practical by allowing a large upfront contribution (deductible immediately) followed by grants distributed at any pace.
The SALT Cap and Its Impact
Photo by Kelly Sikkema on Unsplash
Before TCJA, state and local taxes paid — including state income taxes (or state sales taxes) and property taxes — were deductible without limit. The Tax Cuts and Jobs Act capped this deduction at $10,000 combined ($5,000 for married filing separately) — the "SALT cap." For residents of high-tax states (California, New York, New Jersey, Connecticut, Massachusetts), this cap can represent a loss of tens of thousands of dollars in previously deductible expenses. A homeowner in New York City paying $18,000 in state and city income taxes and $12,000 in property taxes previously deducted $30,000; under TCJA, they deduct only $10,000. The SALT cap is scheduled to expire after 2025 along with other TCJA provisions, but its future depends on Congressional action.
The Home Sale Exclusion
Photo by Jakub Żerdzicki on Unsplash
The home sale exclusion under IRC Section 121 is one of the most valuable tax benefits available to middle-class homeowners. A single taxpayer who has owned and used a home as a primary residence for at least 2 of the 5 years before sale can exclude up to $250,000 of capital gain from gross income ($500,000 for a married couple filing jointly). This exclusion can be used repeatedly — once every two years. A homeowner who bought a house for $300,000 and sells for $600,000 pays no federal income tax on the $300,000 gain if it falls within the exclusion. The exclusion applies to the gain, not the sale price, so tracking cost basis (including improvements) matters: every dollar of documented improvement increases the basis and reduces the taxable gain.
Rental Property and Depreciation
Photo by Anders Holm-Jensen on Unsplash
Rental real estate provides tax benefits that have no equivalent in financial asset investing. The owner of a rental property can deduct ordinary operating expenses (repairs, property management, insurance, mortgage interest, property taxes) against rental income. More importantly, the property itself can be depreciated — the IRS allows the cost of residential real property (not land) to be deducted over 27.5 years, and commercial real property over 39 years. Depreciation reduces taxable rental income even when no actual cash expense is incurred. A $400,000 residential rental property (excluding land value, say $350,000 depreciable) generates approximately $12,727 per year in depreciation deductions. Passive activity loss rules generally limit the ability to use rental losses against other income, with exceptions for active participants with AGI below $150,000 and real estate professionals who qualify under IRS guidelines.