Maximizing Tax Deductions

It’s that time of year: the annual chore of filing your income tax return and hoping for a refund or at least minimizing the amount you must pay in. If you are like the majority of taxpayers these days, you may find yourself claiming the “standard deduction” rather than itemizing your income tax deductions.

Tax deductions allow you to subtract certain specific expenses, including your charitable contributions, from the amount of income on which you must pay taxes. The standard deduction is a dollar amount you can deduct from your taxable income without the need to document individual expenses. If the total of your itemized deductions exceeds the standard deduction, then itemizing saves you more money on taxes.

Claiming the standard deduction is certainly easier: you simply reduce your taxable income by the standard deduction amount with no need to keep records or justify your deductions. For 2024, the standard deduction is $29,200 for married couples filing jointly and $14,600 for single taxpayers.

However, if you do not itemize your deductions, then you receive no tax benefit from the charitable deduction for your contributions.

A savvy strategy to save taxes is to bundle your deductible transactions into years when it makes sense to itemize your deductions. The basic idea is, instead of allowing your tax-deductible expenditures – including your charitable contributions – to occur across multiple years, you concentrate your deductions into one tax year when your itemized deductions exceed the standard deduction amount for that year so that you can take full advantage of your itemized deductions.

By bundling charitable contributions, you can potentially claim a larger tax deduction in one year, reducing your taxable income and lowering your overall tax bill. To maximize the benefit, you will need to plan ahead, scheduling larger contributions for the year you plan to bundle your deductions, or making several year’s contributions in one. A donor advised fund can be a useful tool for bundling charitable contributions.

The deduction bundling strategy may not work for everyone. If your total itemized deductions, even with bundled contributions, is not more than the standard deduction, then bundling will not save you money. There are limits to how much you can deduct for charitable contributions (usually 50% of your adjusted gross income). Shifting the timing of your deductible items can be complex. It is important to consult a tax professional to ensure it fits your specific financial situation.