Schwab Says Lower Your Tax Bill By ‘Bunching' Your Charitable Deductions

Schwab Says Lower Your Tax Bill By ‘Bunching’ Your Charitable Deductions

Donating to charity isn’t just a way to have a positive impact on society – it’s also a savvy approach to reducing your tax liability. Schwab suggests people who donate to charity on an annual basis may want to consider a tax-smart strategy known as “bunching,” which involves making at least two years’ worth of charitable contributions in one year. Doing so can allow you to itemize your deductions for that year and increase the size of your tax deduction over the two-period. Consider working with a financial advisor if you need help with tax planning or charitable giving.

Standard Deduction vs. Itemizing

Each year, tax filers must choose between taking the standard deduction or itemizing their deductions. If your individual tax deductions exceed the standard deduction in a given year, itemizing is likely the preferable approach. The opposite also rings true. If the total value of your itemized deductions is less than the standard deduction, you’ll want to claim the latter.

2023 Standard Deduction

  • Single filers and married couples filing separately: $13,850

  • Married couples filing jointly: $27,700

  • Heads of household: $20,800

2022 Standard Deduction

  • Single filers and married couples filing separately: $12,950

  • Married couples filing jointly: $25,900

  • Heads of household: $19,400

Choosing between taking the standard deduction or itemizing is key when determining how to best maximize the tax benefit of your charitable contributions.

When to Bunch Charitable Donations

Schwab Says Lower Your Tax Bill By ‘Bunching' Your Charitable Deductions

Schwab Says Lower Your Tax Bill By ‘Bunching’ Your Charitable Deductions

If you regularly donate to charity but your total itemized deductions fall short of the standard deduction, you may want to consider bunching your contributions. Doing so means you’ll make multiple years’ worth of contributions in the current tax year, pushing your itemized deductions above the standard deduction threshold. You’ll then take the standard deduction in the following year(s) since you won’t be making any additional donations.

To illustrate the potential benefits of bunching, Schwab ran the numbers on a hypothetical couple with no children. Schwab assumed the couple made $10,000 in charitable donations in both 2022 and 2023. Their other deductions for both years total $13,000. By taking the standard deduction ($25,900 in 2022 and $27,700 in 2023) in both years, the couple’s two-year deduction adds up to $53,600 more than would have been had they itemized in both years.

However, if the couple made two years’ worth of donations in 2022, their itemized deductions would have added up to $33,000. They could have then taken the standard deduction in 2023 and their two-year deduction would have added up to $60,700.

By bunching their charitable contributions, the couple would have lowered their combined taxable income in the two years by $7,100.

Bottom Line

Schwab Says Lower Your Tax Bill By ‘Bunching' Your Charitable Deductions

Schwab Says Lower Your Tax Bill By ‘Bunching’ Your Charitable Deductions

Tax filers who regularly donate to charities should consider how to maximize the tax benefit of their goodwill. Schwab recommends making multiple years’ worth of donations in a single year, so your total itemized deductions exceed the standard deduction. This strategy, which is known as bunching, then calls for you to take advantage of the standard deduction in subsequent years when you won’t be making any donations. Doing so can increase the size of your total deductions over that two-year period and lower your taxable income.

Tips for Reducing Your Tax Bill

  • A financial advisor can help you assess your tax situation and potentially limit how much you end up owing Uncle Sam. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Capital gains can increase the amount of money you ended up owing the government each year. However, harvesting tax losses can help offset those gains. And if your tax losses exceed your capital gains, the IRS permits you to deduct up to $3,000 worth of excess losses from your total income for that year.

  • If you’re approaching retirement and thinking about moving to a new state, consider the tax environment for retirees in that state. SmartAsset’s retirement tax friendliness tool provides an in-depth look at the places with the best and worst tax environments for retirees.

Photo credit: ©iStock.com/donald_gruener, ©iStock.com/aschecky, ©iStock.com/shapecharge

The post Schwab Says Lower Your Tax Bill By ‘Bunching’ Your Charitable Deductions appeared first on SmartAsset Blog.

Source: finance.yahoo.com