Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [CPA] TCP: TCP Masterclass: Deduction Bunching and the Post-OBBBA SALT Cap
Transcript
- Hey, welcome to VoraPrep Audio. Alright, let's talk about a situation you're definitely going to see, both on the exam and with your own clients. Picture this: you have a client, high-income, who gives a good amount to charity every year. They pay a ton in state and local taxes. But when they run their tax software, it keeps defaulting to the standard deduction. And they're frustrated. They feel like they're just leaving money on the table, and they're right. This is where you, as their CPA, can step in with a really smart planning technique called deduction bunching. It's a way to time expenses to push way past the standard deduction, but only in certain years. So what is bunching? It’s really just about strategic timing. Instead of spreading your deductible expenses out evenly every year, where they might not be enough to make itemizing worthwhile, you concentrate them. You pull them all into one single year to create a "bunch" year with a huge itemized deduction. Then, in the next year, the "off" year, you just relax and take the simple, generous standard deduction. Over a two-year period, this almost always gives you a bigger total deduction than just barely squeaking by or falling just short year after year. Here's an analogy that makes it click. Think of it like a coupon collector at the grocery store. If you only have a couple of coupons each week, you might not even bother clipping them out. It’s not worth the hassle. But what if you saved all your coupons for months and then did one massive shopping trip? You could save a ton of money. That one big trip is your "bunch" year. On all the other weeks, you just pay the regular price. That’s like taking the standard deduction. It’s the same exact logic for taxes: save up your controllable deductions for one big year to get a huge tax break. So when you see this on the exam, your first move is to scan the fact pattern. You're looking for a taxpayer whose itemized deductions are always floating right around the standard deduction amount. That's your trigger. That's the signal that this is a bunching question. Once you've identified the scenario, you need to find the expenses the taxpayer can actually control. The number one target here is charitable contributions. People can decide to give this year's gift and next year's gift all at once. Elective medical procedures can sometimes be timed, too. And another classic move is prepaying your last state estimated tax payment in December instead of waiting until January. You’re looking for those flexible payments. Okay, now let’s talk about the new SALT deduction, because this plays into the calculation. The Omnibus Budget and Bipartisan Balancing Act, or OBBBA, made some big changes for 2026. The cap on the State and Local Tax deduction is now $40,400. But—and this is a big but—it gets reduced for high-income taxpayers. The rule is that the cap is reduced by 30% of the taxpayer's Modified Adjusted Gross Income, or MAGI, over $505,000. It's important to know, though, that the deduction can't be reduced below a floor of $10,000. So, for example, if someone has a MAGI of $525,000... that's $20,000 over the threshold. You take 30% of that $20,000, which is $6,000. That’s the reduction. So their new SALT cap isn't $40,400, it's $40,400 minus that $6,000 reduction. Their cap is $34,400. Let’s walk through a full example to see how this all comes together. Let's say we have the Jacksons, a married couple filing jointly. They're under 65, and in 2026 their MAGI is $400,000. The standard deduction for them is $32,200. Every year, their typical itemized deductions are fifteen thousand in state and local taxes, ten thousand in charitable donations, and eight thousand in mortgage interest. So, if we add that up… $15,000 plus $10,000 plus $8,000… that’s $33,000. Without any planning, they'd look at that and say, "Okay, $33,000 is more than the $32,200 standard deduction, so we'll itemize." They'd do that in Year 1 and get a $33,000 deduction. They'd do it again in Year 2 and get another $33,000 deduction. Over two years, their total deduction is $66,000. Simple enough. But now, you come in. You advise them to bunch their charitable donations. So in Year 1, they make this year's $10,000 donation AND next year's $10,000 donation. That's a $20,000 charitable gift in Year 1. Now let's recalculate their Year 1 deductions. It’s the $15,000 in SALT, the $8,000 in mortgage interest, plus that big $20,000 donation. That gives them a total itemized deduction of $43,000 in Year 1. Much better. What about Year 2? Well, in Year 2, they make no charitable gift because they already made it. So their itemized deductions are just the $15,000 in SALT and the $8,000 in interest, which is $23,000. That is way below the $32,200 standard deduction. So, in Year 2, they just take the standard deduction. Now let’s look at the two-year total with bunching. They got $43,000 in Year 1 and $32,200 in Year 2. The combined total is $75,200. Remember, without bunching, their two-year total was $66,000. By bunching, they've increased their total deductions by $9,200. That is a real, significant tax savings. The trap here, the answer that looks tempting but is wrong, is to just look at Year 1 and say, "Well, their normal $33,000 in deductions is already over the standard, so there's no point in bunching." That's thinking in a one-year silo. The whole key to this strategy is maximizing the combined deduction over a multi-year period. Now, if you want to use a really powerful tool for this, especially for charitable giving, you should know about Donor-Advised Funds, or DAFs. A DAF is basically a charitable giving account. A client can make one huge contribution to their DAF in a single year—say, $50,000—and get the entire tax deduction for that $50,000 right away. That’s their "bunch" year. Then, over the next several years, even in years when they take the standard deduction, they can direct the fund to send grants to their favorite charities. It separates the timing of the tax deduction from the timing of the actual gift. It's perfect for bunching. Plus, they can donate appreciated stock, avoid the capital gains tax, and still deduct the full fair market value. It's a fantastic planning tool. One place where it's really easy to get tripped up on an exam question is with that OBBBA SALT cap. Someone might see a taxpayer with a MAGI of, say, $600,000 and just automatically apply the $40,400 cap. But you can't do that. You have to run the phase-out calculation first. For that taxpayer, the reduction would be 30% of the amount over $505,000, which is $95,000. So 30% of $95,000 is $28,500. Their cap would be $40,400 minus that $28,500, which is only $11,900. Always, always check the MAGI before you decide on the SALT deduction. If you're looking for a simple way to remember the key elements of a bunching strategy on exam day, just think of the word BUNCH. B is for Big charitable gifts, like with a DAF. U is for Understand the AGI floors, especially for things like medical expenses. N is for Know your standard deduction threshold. C is for Calculate the multi-year impact. Don't get stuck looking at just one year. And H is for High-control expenses—those are your targets. This is the kind of practical, high-value tax planning that separates a good CPA from a great one. And if you want to get more practice on topics just like this, we've built out a whole system for it. VoraPrep is a full exam-prep app with lessons, thousands of practice questions, and an AI tutor to help you when you get stuck. You can try it out for free at Vora Prep dot com. So, to wrap it up: bunching is all about concentrating your controllable deductions into one year to blast past the standard deduction, and then taking the standard deduction in the off years. Charity is your best lever, and a Donor-Advised Fund is the best tool for pulling that lever. And always watch out for that high-income phase-out on the SALT deduction. Alright, that's it for today. You're putting in the work, and it's going to pay off. Keep it up, and I'll talk to you on the next one.