The IRS has two approaches to general income tax deductions: the standard deduction or itemized deductions. The standard deduction is a set amount deducted from your income before you’re taxed. It’s sort of the ‘hassle-free’ option when it comes to your return. Since the Tax Cuts and Jobs Act (TCJA) of 2017 increased the standard deduction amount, the vast majority of taxpayers choose to take the standard deduction of $12,950 (single taxpayers) or $25,900 (married, filing jointly) at year-end (figures for the 2022 tax year).
Itemized deductions allow you to combine your eligible expenses and deduct that sum from your income before you pay tax. The six categories for eligible expenses are:
- state income taxes or sales taxes paid*
- real estate taxes paid*
- medical expenses
- mortgage interest
- charitable contributions
- and misc other itemized deductions
*1 and 2 are capped at $10,000 combined.
When would itemized deduction be the best option for my tax return?
You can use a bit of strategy to take advantage of itemized deductions. One popular strategy is charitable donation bunching. If most of your itemized deductions come from donations, you can “bunch” them together every other tax year and maximize your tax deduction. Perhaps the best way to understand it is to put it in context:
Example: You and your spouse typically donate $20,000 to qualified charities each year. You have no other itemized deductions. You wouldn’t itemize in either 2021 nor 2022 because $20,000 per year is less than the standard deduction of roughly $26,000. Instead, you could “bunch” your donations so you contribute $0 in 2021 and $40,000 in 2022 (maybe you donate $20,000 on January 1, 2022 and $20,000 on December 31, 2022). Now you can take a full standard deduction in 2021 and utilize a $40,000 itemized deduction in 2022. So with bunching, your total deductions for the 2 years = $66,000. Without bunching, your total deductions for the 2 years = $52,000. That’s a $14,000 increase which, depending on your tax bracket, could be $4,000+ in tax savings!
Which option is right for me: standard deduction or itemized deduction?
For your 2022 tax return (filed during 2023), the standard deduction for single taxpayers is set at $12,950 and for married filing-joint taxpayers it’s $25,900.
Obviously, it makes sense to select the higher of the two deductions (you can only choose one). For this reason, most people choose the standard deduction. If all your itemized deductions aren’t greater than the applicable standard deduction amount, you should take the standard deduction. If you’re unsure of which option is right for you, or if you think you might be a candidate for itemized deduction, we advise you to discuss it with your accountant. After all, you only want to pay what you owe!
The Revel Difference
There are lots of ways you can save on tax and you can read about all of these strategies in this blog. If you have any more questions on deductions and charitable donation bunching, you can get in touch with the Revel team by visiting the Work With Us page on our website. We’d love to help you make the right decision.
