Welcome back to our fourth-quarter blog series covering various aspects of our federal tax code. Today, we will explain standard versus itemized tax deductions and how thinking strategically around these deductions can help your overall tax obligation in the long run.

Standard vs. Itemized Deduction: What You Need to Know

When calculating your taxable income, you are allowed to subtract various items from your gross wage to arrive at the amount of income that is subject to federal income tax.

One of those is called the Standard Deduction, as it is available to virtually every taxpayer. However, the IRS also permits taxpayers to add up certain allowable expenses and “itemize” their deductions in lieu of taking the standard one available to everybody.

These itemizable expenses include the following:

• Medical expenses exceeding 7.5% of adjusted gross income

• Home mortgage interest (subject to certain limitations)

• Up to $10,000 of State & Local Taxes, including tax paid on income and real estate

• Charitable Giving

How Do These Deductions Work?

You are not permitted to take both types of deductions in a single year. Instead, you should compare the sum of your itemizable deductions against the standard deduction and select the higher of the two.

For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for those that are married filing jointly. There is also an additional standard deduction available to taxpayers who are over age 65 and/or blind.

As a result, most taxpayers take the standard deduction and do not ever see a tax benefit for their “itemizable” expenses.

This is where strategy comes into play.

Charitable Chunking Strategy

As you review the list of itemizable expenses noted above, you will notice that you do not have much control over most of them, except for charitable giving. That is where Charitable Chunking comes in.

Charitable Chunking involves combining multiple years’ worth of charitable giving into one tax year to obtain a larger tax deduction every other year. The benefit to taxpayers is that it ends up lowering their lifetime tax bill when compared to taking the standard deduction every year.

Let’s review a simple example: take a married couple in their forties making $180,000 per year. Their itemized deductions in a normal year total $25,000, including $15,000 of charitable giving. As mentioned above, the standard deduction is $29,200.

They take the standard deduction every year, as it is always higher.

However, if they combine two years’ worth of charitable giving in one year, they will be able to itemize, resulting in a lower tax bill! This hypothetical couple can then continue this strategy every other year: in the “off year,” they take the standard deduction, and in the “on year,” they itemize.

While the immediate benefit may seem modest, repeating this strategy over decades can lead to significant tax savings by maximizing deductions in high-deduction years.

When paired with a Donor-Advised Fund, this strategy can prove to be a great way to lower your lifetime tax bill while keeping the cash flow to charity stable.

Empowering a Life of Purpose Through Planning

In closing, navigating our federal tax code can be complex, but the right strategies can unlock significant opportunities to reduce your tax burden and align your finances with your personal goals.

Whether it’s charitable chunking or other tailored approaches, our team specializes in finding solutions that work for your unique circumstances. We love finding ways to help clients achieve their goals while helping them think more strategically about their tax situation.

If you or someone you know could benefit from our assistance, contact us today to explore how we can help you think strategically about your taxes and plan for a more secure financial future.