"Today, it takes more brains and effort to make out the income-tax form than it does to make the income." - Alfred E. Neuman
A mistake or missed opportunity on your tax return is money you’ll never get back.
Although filing taxes can be a burdensome and painstaking process, it can also be a fantastic opportunity to put more money back in your pocket if executed strategically.
Tax reform known as the Tax Cuts and Jobs Act (TCJA) created broad-sweeping changes to our tax code. Perhaps most notably, the TCJA doubled the standard deduction, reducing the number of tax filers that could benefit from itemizing their deductions to roughly 10 percent of Americans.
This is important because those who itemized deductions in the past, but now fall below the standard deduction threshold ($27,700 for married-filing-jointly, $13,850 for single filers), found their previously-itemized deductions provided no tax benefit last year.
If the increased standard deduction now puts you on the cusp of itemizing your deductions, there are a few strategies that can put you over the hump and lower your tax bill:
1. Charitable Lumping
Let’s say you have $10,000 of mortgage interest, $8,000 of charitable contributions, and $5,000 of state and local taxes. If you’re married filing jointly, your standard deduction is set at $27,700 in 2023, or $4,700 higher than your itemized total listed above ($23,000). Under this scenario, you receive no tax benefit from your charitable contributions, mortgage interest, or state and local taxes.
However, instead of donating $8,000 in 2023 and 2024, you could donate $16,000 in 2023 and nothing in 2024. In this example, you’ve given the same amount of money over a two-year period, and you have also increased your itemized deductions to $31,000 in 2023. This represents an additional $3,300 you won’t owe taxes on in 2023. Utilizing this strategy allows you to maximize the use of your charitable deductions in 2023, while receiving the full benefit from the increased standard deduction in 2024.
If a charitable-lumping strategy might work for you, a Donor Advised Fund (DAF) could further maximize your philanthropic gifts.
2. Qualified Charitable Distribution (QCD)
If you’re over age 72, you can donate up to $100,000 of your Required Minimum Distribution directly from your IRA or 401(k) to your favorite charity tax-free. A QCD is excluded from taxable income, unlike regular withdrawals from an IRA. Utilizing a QCD could potentially lower Social Security and Medicare taxes as well.
If you’re over 72 and charitably inclined, a QCD could materially reduce your tax bill.
3. Timing Tax Payments
Under certain circumstances, the timing of property taxes can be shifted to a different year. For example, if 2023 property taxes are assessed late in calendar year 2023, it may be possible to delay the payment to 2024, effectively doubling your property tax payments in 2024 - thus increasing your itemized deductions for that year.
For self-employed individuals, it may also be possible to shift the timing of estimated state income tax payments.
It’s important to recognize the lumping and timing strategies mentioned above only pertain to taxpayers who, by utilizing these strategies, can reach itemized deductions that exceed the standard deduction threshold. Otherwise, the standard deduction will always apply.
For those close to itemizing in any given year, deduction timing and lumping could be an appealing opportunity. If repeated systematically over time, these strategies can add significant tax savings over the long term.