Stack Income Tax Deductions

Stacking flexible itemized deductions into high-income years maximizes tax savings.

Strategy Overview

When households file their taxes, they can always utilize "above-the-line" deductions, and for "below-the-line" deductions they can use either the standard deduction or itemized deduction (whichever is greater). With careful planning, a household can intentionally trigger/realize certain tax deductions in a single year, which will help maximize their income tax deductions, reducing their tax bill.

This benefit can also be amplified if a household strategically does this in a year when they have uncommonly high income (because tax brackets are progressive, so your applicable tax rate rises as income increases).

Tax Details

Deductions are expenses that the IRS allows you to use to reduce your taxable income; some deductions are the Above-the-Line type (always can be taken) and others are below-the-line type (you take the greater of the standard deduction of your total itemized deductions). The higher the amount of deductions you have, the lower your taxable income (and thus your tax bill).

Many households have some deductions that generally recur each year, and others that are more flexible/variable. And with smart planning, some tax deductions can even be "pulled forward" into a specific tax year.

The stacking strategy involves a mix of (i) strategically increasing or timing certain expenses to occur in the same year, and/or (ii) consolidating or pulling forward anticipated future expenses into a specific year. And the benefit is amplified for tech professionals if they strategically target this occurring in a year with atypically high income (e.g. an NSO exercise or a RSU double-trigger event). For example, for a targeted year a household could:

• Increase their retirement plan (e.g. 401k) contributions in a year of high income (if they don't typically max out)

• Sign up for and contribute the maximum to an HSA or FSA

• Intentionally delay or pull forward a large anticipated medical expense

• Make multiple years of anticipated charitable contributions in the same year by utilizing a Donor Advised Fund

Note: Certain deductions have caps, either explicitly or as a function of income

Key Benefits

• Maximize value of deductions. Stacking your deductions in one high-income year can help you reduce your overall taxes. And with below-the-line expenses, stacking may shift you from the standard deduction to a larger itemized deduction for a given year.

• Reduce income tax burden in high income years. By stacking deductions in a high-income year, you can amplify the effect by reducing the amount of taxes applicable to higher rates.

Key Considerations/Flags

• Need to forecast taxes to identify good opportunity years. This strategy requires careful tax planning and forecasting. You would ideally identify years where your income will be significantly higher in order to achieve the highest tax savings from stacking your deductions.

• Typically requires use of a donor advised fund (DAF). A donor advised fund can be a useful tool for this strategy, particularly if you're stacking charitable contributions. But if you're not charitably inclined, then this part of the strategy likely does not apply.

• Deduction limits still apply. It's also important to remember that certain deductions have limits. For instance, your charitable contributions deduction generally can't exceed 60% of your adjusted gross income, although there are exceptions.

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• If you have an unusually high income year (e.g. an NSO exercise or a RSU double trigger event)

• You have the financial resources to be able to commit to certain items, such as fully funding your (and, if applicable, your spouse's) 401k plan(s)

• You have sizable expenses in categories like mortgage interest, state/local taxes, charitable donations, medical bills, etc. that could allow you to exceed the standard deduction

• You frequently give to charity, and have the flexibility to "stack" those deductions in one year (typically via a Donor Advised Fund)

🔴 When to Not Use This Strategy:

• If incremental Below-the-Line itemized deductions would be either (i) not shift you from the standard deduction to the itemized deduction, or (ii) if the difference between the two would only be marginal

• When you don’t have flexibility in your deductions. Certain deductions, like state and local taxes or mortgage interest, are less flexible and can’t be easily adjusted or planned for a specific year.

Example