Giving to charity is a wise strategy to lower your tax liability in addition to being a good way to give back to the community. According to Schwab, those who make yearly charitable contributions might want to think about the tax-smart tactic known as “bunching,” which is donating the equivalent of at least two years’ worth of donations in a single year. By doing this, you may be able to maximize your tax deduction over the course of the two-period period and itemize your deductions for that particular year. If you require charity giving or tax preparation assistance, think about collaborating with a financial expert.
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Comparing itemizing and standard deduction
Every year, taxpayers must decide whether to itemize their deductions or take the standard deduction. Itemizing is probably the better course of action if your individual tax deductions in a given year exceed the standard deduction. It likewise holds true in the other way. You should claim the standard deduction if the total of your itemized deductions is less than that amount.
2023 Standard Deduction
- Married couples filing separately and single filers: $13,850
- Joint filing by married couples: $27,700
- $20,800 for heads of household
2022 Standard Deduction
- Married couples filing separately and single filers: $12,950
- Joint filing by married couples: $25,900
- household heads: $19,400
To optimize the tax benefit of your charitable contributions, you must decide whether to itemize or take the standard deduction.
When to Combine Donations to Charities
You might want to think about bunching your contributions if you make frequent charitable contributions but your overall itemized deductions are less than the standard deduction. If you do this, your current tax year’s contributions from several years will be made, exceeding the standard deduction level for itemized deductions. Next year(s), since you won’t be making any further donations, you’ll take the standard deduction.
Schwab did some math on a hypothetical childless couple to show the possible advantages of bunching. Schwab estimated that in 2022 and 2023, the couple gave $10,000 to charity. A total of $13,000 is their other deduction for both years. The couple’s two-year deduction totals $53,600, which is more than what they would have received if they had itemized in both years and instead took the standard deduction ($25,900 in 2022 and $27,700 in 2023) in both years.
Nonetheless, the couple’s itemized deductions in 2022 would have totaled $33,000 if they had donated the equivalent of two years’ worth of money. Their two-year deduction would have totaled $60,700 if they had claimed the standard deduction in 2023.
The couple would have reduced their combined taxable income in the two years by $7,100 by grouping their charitable contributions.
In summary
Contributors to charity on a regular basis should think about maximizing the tax benefit of their goodwill. Schwab advises accumulating donations from several years into one year so that your total itemized deductions surpass the basic deduction. The next step in this bunching approach is for you to use the standard deduction in years after this one since you won’t be making any donations. By doing this, you may reduce your taxable income and boost the amount of all the deductions you take during that two-year period.
Advice on How to Lower Your Tax Bill
- You can evaluate your tax status and possibly reduce the amount of money you ultimately owe Uncle Sam with the assistance of a financial expert. Discovering a financial counselor doesn’t have to be difficult. Using the free service from SmartAsset, you may find up to three local, vetted financial adviser matches. You can then schedule a free initial consultation call with each advisor to see which one is best for you. Get going right away if you’re prepared to hire a financial advisor who can assist you in reaching your objectives.
- You may end up owing the government more money annually as a result of capital gains. Harvesting tax losses, though, can assist in offsetting such gains. Additionally, the IRS allows you to deduct up to $3,000 in excess losses from your overall income for the year if your tax losses exceed your capital gains.
- When considering retiring and relocating to a different state, take into account the state’s retirement tax laws. The retirement tax friendliness tool from SmartAsset offers a detailed analysis of the areas with the best and worst tax climates for retirees.
