Standard Deduction Versus Itemized Deduction: Which Makes Sense For You?

In 2017, congress passed the Tax Cuts and Jobs Act (TCJA), nearly doubling the standard deduction. This change to the tax filing system benefits most taxpayers in the lower income brackets and some in the higher tax brackets. For those who have itemized in the past, although it may seem your charitable giving dollars are not as much of a tax benefit to you after TCJA, there is a strategy where you can continue to give to your favorite charities and create some additional tax benefits for you.

One of the goals of the TCJA was to simplify and streamline the tax filing process. The standard deductions changed from:

• $6,500 →  $12,000 Single Filers
• $13,000 →  $24,000 Joint Filers
• $9,550 →  $18,000 Head of Household Filers

After the TCJA, most taxpayers with incomes below $200,000 no longer itemize. Taxpayers will naturally choose the deduction option that lowers their taxable income the most and maximizes what they keep. Going forward, electing to itemize only makes sense for filers where the combination of the following items exceeds the standard deduction, which has grown to $27,700 in 2023 for married filing jointly.

Itemized Deductions for most tax filers are comprised of some combination of:

• Medical Expenses that exceed 7.5% of your Adjusted Gross Income (AGI)
• State and Local Taxes (SALT), including your property taxes. As a provision in TCJA, the cap is $10,000
• Mortgage Interest maximum amount of debt is limited to $750,000
• Charitable Donations

The standard deduction is a fixed amount for all taxpayers, depending on your filing status. This means you get the full standard deduction yearly, assuming your standard deduction exceeds your itemized totals. For clients who annually gift to charities, there may be a planning opportunity by bundling multiple years of giving into one year, so in that year, you would have enough itemized deductions to exceed the standard deduction threshold. The bundled charitable donations can be placed in a Donor Advised Fund (DAF) and distributed to the charities in future years while you get the deduction all in one year, the year you funded the DAF. 

For example:

Susan and Sam Smith have the following typical tax year:

Since their itemized deductions are less than the $27,700 (the 2023 Standard deduction), they would elect to take the standard deduction and not get any tax benefit from their charitable contributions. If we assume this same scenario plays out for them over the next five years, they will receive $138,500 of deductions ($27,700 x 5)

If we look at bundling five years of their Charitable giving into year 1 using a Donor Advised Fund, their deductions over five years would look like the following:

Year 1

Then, in years 2-5, they would take the standard deduction ($27,700 x 4 = $110,800), resulting in a total of $157,800 in deductions over 5 years using charitable bundling as opposed to the $138,500 they would have been able to take had they just taken the standard deduction each year.

In this example, this strategy adds $19,300 of deductions without additional expense to you, the taxpayer. At the 22% federal and 8% state tax rate, you may have saved up to $5,790 ($19,300 x 30%) in taxes. Each year, you can distribute to your charities from your Donor Advised Fund, so they continue to receive the annual gifts you have been giving in the past. If you have appreciated assets, there is an added tax benefit. You can gift your appreciated assets to the Donor Advised fund and avoid paying taxes on the gains. Talk with your financial advisor about whether this strategy makes sense for you. The bottom line is by bundling your gifting; you may be able to take advantage of combining itemized and standard deduction years and save yourself significant tax dollars.