Season’s Greetings! I know it’s early to talk about the holidays, but 2020 has been a rough year and frankly, I’m more ready for the joy of the holidays than ever before. I have already starting watching the Hallmark Channel’s Christmas movie marathons and we even have our Christmas tree up! With the end of the year around the corner, we should take a moment to think about our finances and if there are things we can do to improve our tax return results for 2020. Since donating to charity is on people’s minds at this time, let’s discuss this further.
Itemize or Standard Deduction?
As you probably know, charitable giving only helps you on your tax return if you can itemize your deductions. This rule has changed a lot in the past few years. Itemized deductions consist primarily of medical expenses, mortgage interest, state and local taxes, and charitable donations. When the sum of those items exceeds the standard deduction, the taxpayer benefits from each additional dollar so we want to make sure we account for all of them. The standard deduction for most married taxpayers was $12,700 in 2017, then it jumped up to $24,000 in 2018, and will be $24,800 for 2020. Many people think of charity first but by the numbers it is actually the smallest itemized deduction at 13%. Medical expenses (35%), mortgage interest (27%), and taxes (25%) are all larger sources of deductions.
Tips for Itemizing
Are you on that bubble of not having enough deductions to itemize? If so, try this: plan ahead and time your payments so you can itemize every other year! You can pay extra for charity, real estate taxes, and pay down medical bills in 2020 and then wait until 2022 to do it again. These payments are deductible in the year they are paid, so by timing the payments right you can essentially take double deductions every other year and just save up in the other years. For example, Indiana real estate taxes are paid in arrears which means you are assessed taxes in 2020 but they aren’t due to be paid until 2021, so if you pay those taxes before the end of the year you can deduct the 2019 taxes (that were due in 2020) and the 2020 taxes (due in 2021 but paid early in 2020) all on your 2020 tax return. That way you can get full benefit of your deductions every other year rather than minimal (or no) benefit by paying the base amounts each year. Please discuss these strategies further with one of our tax professionals as there are certain rules and limitations to consider as well.
The Spirit of Sharing and Caring
Let’s circle back to the holiday cheer and spirit of sharing and caring that is so well captured in all those Hallmark Christmas movies. There were a number of people predicting that charitable giving would drop after the increase in standard deduction because so many people would no longer have enough deductions to itemize anymore. It appears however that the main impetus for charitable giving is not tax deductibility because according to the Giving USA Foundation, American donors gave $410 billion in 2017, $428 billion in 2018 (4% increase), and $450 billion in 2019 (5% increase). Did you know that over 30% of all charitable giving occurs in December?! So please continue to give to charity this holiday season as it provides so much good in our communities, but also keep your receipts so we can deduct those dollars on the tax return!
Have questions about any of this information? Feel free to give us a call!
Blog by Tim McGuffin, EA – Business Tax Professional
Learn more about Tim and the rest of the Storen Financial team here.