Not Your Standard Tax Savings Strategy - EP #83

Mar 25

Welcome to episode 83 of the One for the Money podcast. This episode airs in April, which means we are in the final days of tax season. I’ve never met anyone who likes paying more taxes than they have to, and in this episode, I’ll share how you can utilize the standard or itemized deductions so you don’t have to pay them. Hence the title of this episode, not your standard tax savings strategy.

In the tips, tricks, and strategies portion, I will share a tip regarding how paying it forward can save you on taxes.

In this episode...

Standard vs. Itemized Deductions [2:15]
Tax Planning Strategies for Deductions [7:04]
Benefits of Donating Stock vs. Cash [9:17]
Importance of Tax Planning in Financial Strategy [11:32]

MAIN
One of the best financial planning quotes I’ve read is this “In America, there are two tax systems; one for the informed and one for the uninformed. Both are legal.”
How true that is. But the challenge with being “informed” about taxes is that Taxes are incredibly complex. Just the federal tax code alone is over 6700 written pages, and the US treasury’s interpretations of the tax code, because it isn’t sufficiently clear, are tens of thousands of pages more. For these reasons and others, many individuals ignore the tax laws altogether and consequently pay more taxes than required. However, with a little bit of better tax planning, you can have a better life because you will pay less in taxes and have more money to spend on great experiences.
A particular area that many taxpayers don’t understand is the deductions everyone receives on their income. Deductions are the amount of your income that is not taxed at all. Taxpayers will take one of two forms of these deductions, which are known as either the standard deduction or itemized deduction. The standard deduction is a default amount of income that you would pay no taxes on. The itemized deductions are for those individuals who have certain key items (such as medical expenses, mortgage interest, gifts to charity, and state and local taxes) that would provide a higher amount of their income that is not subject to tax.
Just what are the amounts not subject to tax, well in 2025 the standard deduction for an individual is $15,000, and for a married couple it is just double that or $30,000. A reminder, what that means is on the first $15,000 of income an individual pays 0% in taxes. So if a person has $65,000 of income in 2025, they would only have to pay Federal taxes on $50,000 because the first $15,000 of their $65000 salary is not taxed.
I should note that the standard deduction wasn’t always this high, but back in 2019 when the Tax Cuts and Jobs Act was passed, it doubled the standard deduction from what it was previously. Before this doubling of the standard deduction, just over two-thirds of taxpayers took the standard deduction and just under one-third itemized deductions, but now with the increase of the standard deductions, over 90% of taxpayers claim the standard deduction with just around 9% taking itemized deductions. That’s a good thing for most tax payers as lower earners had more of their income not subject to tax.
Just what are these itemized deductions? Itemized deductions are when individuals have items on which they spent their income, that in total, were higher than the standard deduction. Itemized deductions are captured on Schedule A of the tax forms. There are primarily four items. The first is Medical expenses, the second is mortgage interest on your primary and secondary residence, the third is state and local taxes, and the fourth is charitable contributions.
For medical expenses, it is only for those that are above 7.5% of your AGI. So if your adjusted gross income was $100,000, you would include with your itemized deductions any medical expenses that were more than $7500 for that tax year. So if you had $10,000 worth of medical expenses, you would include $2500 in your itemized deductions.
The next item included is interest on your primary or secondary mortgages. If your interest paid was $5000, then that would be added to your itemized total.
The next item you include is the state and local taxes paid. This includes state income taxes as well as property taxes. For individuals in high-income tax states like California or NY, this would seem like a benefit, but the Tax Cuts and Jobs Act limited the amount you could itemize to just $10,000. So if you paid $20,000 in state and local taxes (which includes property taxes) you only get credit for $10,000.
The final item you would include with your itemized deductions is charitable contributions. These are cash or other donations (donating your car for example) that are made to any non-profit organization such as the American Red Cross, the Salvation Army, or even your church.
If you gave $10,000 to the American Red Cross, then that would be added to your itemized deduction amount.
Now, if the total of your itemized deductions is more than the standard deduction you would have more of your income not subject to taxes. Let me share an example for clarity. Let’s say an individual paid $5000 in mortgage interest, another $6000 in State and Local taxes, and gave another $5000 to charity. Their total of itemized deductions is $16,000. Now this person could elect to take the itemized deduction of $16,000 or the standard deduction of $15,000, which is the default that everyone gets. Of course, the person will elect to take the itemized deduction because it’s $1000 higher, and therefore $1,000 more of their income would not be taxable.
Here is where better tax planning can come in and help save an individual from paying even more on taxes. One such better tax planning strategy is to plan so that a person’s itemized deductions are even higher. An example would be when you would combine your charitable contributions from multiple years into a single tax year. This would then increase your tax savings.
Let me provide an example for clarity. The example I previously shared was of an individual who paid $5000 in mortgage interest, another $6000 in State and Local taxes, and another $5000 to charity. That raised their itemized deductions to $16,000 which is higher than the standard deduction of $15,000. Now if this individual planned to contribute $5000 every year to charity, what if instead of giving $5000 in two consecutive years he gave $10,000 in the first year and $0 in the second? In the year that he gave $10,000 to charity, his itemized deduction would rise to $21,000 instead of $16,000. That’s an extra $5000 not subject to tax. Then in the following year, his itemized deductions would only total $11,000, $5000 for the mortgage interest, and $6000 for SALT. Because this would only add up to $11,000, he would take the standard deduction instead and have $15,000 not taxed. Over the two years combined, he contributed the same amount to charity, he also paid the same amount in property taxes, and he paid the same amount in mortgage interest, but overall he paid less in taxes because he made adjustments so $9000 was not subject to tax. Now of course this was a hypothetical example. The amount of mortgage interest usually decreases each year and the standard deduction amount is adjusted each year for inflation, but you can get the general idea of how bunching charitable contributions in a single year can save you a lot in taxes over both years. This is a great example where those who are informed can pay less taxes than those who are uninformed.
Staying with Charitable contributions can make a significant difference for individuals and couples to save on taxes. Now we don’t give to charity to save on taxes, but instead, we give to causes or organizations we believe in. Because we are giving that money to another cause or organization, we don’t have to pay taxes on that portion of our income.
But for individuals or couples that own stock there are much better ways to give to charity that can greatly benefit both you and the charity you are donating to. The single worst way to give to charity is to sell stocks and give the proceeds to the charity. You would have to pay taxes on any gains and the charity would receive the proceeds less the taxes paid. The better way to donate to charity is by directly transferring stock from your non-retirement account to a charity. This way you don’t have to sell the stock. The charity receives the stock and then they can sell it and won’t pay any taxes since they are a non-profit organization. The individual donating gets a larger contribution for their itemized deductions and the charity will receive more in the process.
But here is another way that an individual can benefit from contributing highly appreciated stock to a charitable organization. Let’s say this individual bought stock in XYZ company for $5,000 and it has grown to over $25,000. Let’s say this individual also plans to give $25,000 to charity this year as well. But he doesn’t want to sell his XYZ stock because he still thinks it has more room to grow.
A great option for this individual would be to donate the $25,000 in stock to the charity or charities of their choice and then use $25,000 to purchase stock of company XYZ. He still owns $25,000 of stock in XYZ company, but he doesn’t owe any taxes on this stock at present because it's equal to the amount he paid. The stock he donated to charity had a $20,000 gain and by donating the stock, he eliminated any capital gains on his original purchase of XYZ stock. He has the same amount of stock, but no longer has a tax problem.
I share again the quote I shared at the beginning of this episode “In America, there are two tax systems; one for the informed and one for the uninformed. Both are legal.”
Being informed regarding the tax code, or working with a financial planner that utilizes better tax planning strategies can lead you to have a better life because it will be full of more experiences paid for with money you saved from taxes. If you or your financial planner are not considering tax planning as part of your overall financial strategy, you need to consider working with someone who does. We implement quite a number of tax-saving strategies for our clients such as Roth Contributions, Roth Conversions, Pre-tax IRA, 401k, and cash balance plan contributions. We also ensure clients fund their health savings accounts as well as implement the strategies explained earlier in this episode.
TIPS, TRICKS AND STRATEGIES
Welcome to the tips, tricks, and strategies portion of the podcast where I will share tips on how you can pay it forward, so to speak, and save on taxes.
As a reminder, itemized deductions are comprised of certain key items (such as medical expenses, mortgage interest, gifts to charity, and state and local taxes).
Earlier I shared how increasing charitable contributions in certain tax years can make a big difference for individuals to save on taxes but is it possible to increase other itemized categories as well? You can do that with state and local taxes as well as mortgage interest.
You do this by paying next year's taxes and some of next year's interest in the current year. This can be done by making your January mortgage or property tax payments in late December. Those additional amounts would be reported in the previous tax year and could potentially save you even more via itemized deductions.
Now let me take a moment to note that some might think it’s not fair that homeowners receive a break on their taxes because of the mortgage interest they pay. Renters don’t receive a break whereas homeowners do. I have to say that I completely agree, but those are rules Congress wrote and I’m sure the real estate and mortgage industry lobbyists worked to get that included. As another saying goes, the golden rule really is those that who have the gold write the rules.
Now being able to get a deduction on interest paid, isn’t a reason to purchase a home. There are many other more important reasons, but that could be a potential bonus. I should also note that the wealthy don’t necessarily benefit from the mortgage interest exemption. Because with the Tax Cuts and Jobs Act (TCJA), you can only deduct interest up to $750,000 of mortgage debt. This is for mortgages taken out after December 15, 2017. For mortgages taken out before that date, the limit is $1 million. So mansion owners shouldn’t benefit.
Well, I hope you found these helpful, and until next time, remember a better life is a result of better planning and that must include tax planning. Have a great one!