This year will be the first year that the majority of the Tax Cuts and Jobs Act applies to your tax return, and it’s bringing a lot of changes. One of those major changes is causing taxpayers to reevaluate when they make their charitable contributions so that they can maximize their deductions over time. Properly timing your donations and payments on other deductible expenses can significantly impact your tax return, and can save you tens of thousands of dollars over the years. Here’s what you need to know to properly bunch your charitable contributions so that you pay less in taxes.
Itemized versus Standard Deductions
When you file your taxes, you will have to choose between taking a standard deduction amount or itemizing all of your contributions and other deductible expenses to claim an itemized deduction amount. If you’re like most taxpayers, in the past, you simply added up your deductions for the year and compared it to the standard deduction amount; then, you would take whichever deduction was higher.
However, being more proactive about your taxes, and planning out your charitable contributions can make a huge difference on your tax return. If you make regular contributions to a charity every year, deferring those regular payments by a few weeks can save you thousands in taxes.
Bunching Charitable Contributions
Many of the clients we meet with make regular contributions to their church in the form of tithing. These clients often make a lump sum payment at the end of each year, and that amount is often the same from one year to the next. Here’s an example: You’re going over your deductions this year, and you have $26,000 in itemized deductions, including a $14,000 tithing payment that you plan to make at the end of the year, just as you do every year.
Because your itemized deductions are higher than the standard deduction of $24,000, you might think that you should simply take the itemized deduction amount. Assuming your deductions are about the same every year, this would give you a total of $52,000 in deductions between this year and next year. However, there is a better option.
Rather than making your $14,000 donation to your church at the end of December, you can postpone your tithes until January of 2019, and claim the standard deduction of $24,000 for 2018. Then, in December of 2019, you can make your regular $14,000 tithe payment to the church. Again, assuming your other deductions are roughly the same as the previous year, this would allow you to claim $40,000 in itemized deductions for 2019. Combined with the standard deduction from 2018, this gives you a total of $64,000 in deductions for both years. Essentially, deferring your tithing payment by a couple of weeks allows you to claim an additional $12,000 in deductions.
By following this pattern and alternating between itemized deductions and standard deductions every year, you could save thousands of dollars in taxes over the years. Depending on your particular situation, certain qualifying expenses could be bunched in a similar way, allowing you to reap an even greater benefit on your return.
For more advice on how to properly time your charitable contributions and maximize your deductions, meet with a Provo tax planner from Biesinger & Kofford CPAs. We’ll help you prepare your 2018 tax return while also helping you to plan out your contributions for future tax years, so you can save money.