Ep. 13 | Itemized vs. Standard Deduction
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Speaker 2:Welcome everybody back to teaching tax flow, the podcast. Again, happy New Year. Now we're in the second week of 2023, episode 13. So what does that mean to to us? This is actually interesting because I don't think we really had a good topic to talk about when we were figuring this out on our schedule.
Speaker 2:And somebody reached out and asked one of our members of TTF, Teaching Taxable, one of our community members. And, Chris, if I remember right, it it was it was interesting, but then it's a common one. So before we jump into that, again, I'm John Tripalski, cohost of the Teaching Tax Flow podcast. To my right, the bald, better looking, smarter, elder gentleman. We just call him Chris Chris Pacquero, our CPA, our genius, the brains behind TTF.
Speaker 2:How you doing, brother?
Speaker 3:This bald head's not gonna be able to get out of the get through the door if you keep pumping me up like that, but I am doing wonderfully.
Speaker 2:Man, we can't even print you business cards if we wanted to because of all the acronyms you have. It would be like a three line thing.
Speaker 3:Yeah. We can't we can't do that. We that's alright, though. I I've enjoyed not having business cards for almost three years now.
Speaker 2:We'll just tattoo it on you. We'll be fine. QR code. You need a QR code on your back shoulder. Alright.
Speaker 2:So so this topic, again, is is interesting. And I love pulling from questions that people ask us or things we hear at conferences and and kinda throwing it into the mix. So, again, Chris, I don't remember exactly how they worded this, but it had something to do with they had made a donation either at a Goodwill or a Salvation Army. It was a significant donation, I believe, of home goods or home decor items and clothing items, and they dropped all this stuff off. And I believe they said they they were super excited about it because it was thousands and thousands of dollars of of what they deemed as the value of all this stuff.
Speaker 2:So our title of this really is just breaking down, right, the differences and and how they work between itemized and standard deduction. So passing the baton over to you, my man. Kinda break those apart for us a little bit. Similarities and differences.
Speaker 3:Well, that was a very good question. And, we get this question often in the teaching tax flow ecosystem. Itemized versus standard deduction, which one should you go with? In general, you're gonna go I when you know? So we're talking about a personal tax return.
Speaker 3:Each personal tax return filed is granted a standard deduction. That deduction number is used to reduce your adjusted gross income in calculating taxable income. So let's start with the standard deduction first. The standard deduction changes every year. It goes up a little bit by a little bit with inflation typically, and it depends on your filing status.
Speaker 3:So that's
Speaker 2:And and that's and, Chris, not to not to cut you off completely with that, but so I'm sure there's differences, right, between personal and business, obviously, a little bit. Maybe maybe it's the same. Maybe it's a little different. But then also too, like, let let's look at this from a, you know, from a standpoint of somebody dropping off smaller donations, you know, when you're getting the the tax slips occur, the deduction slips across the counter. But also, you know, maybe we get into this one.
Speaker 2:Maybe we save this for a little bit later date, but, you know, donating vehicles or boats, I think, is now a big thing too. So
Speaker 3:Well, there's special rules for donating vehicles and boats or anything over £5,000 or $5,000. But let's go back to standard deduction. So for 2023, the standard deduction for someone that's married, filing jointly, or surviving spouse is $27,700. That means if someone has $47,700 of adjusted gross income, they have no deductions. They can just get an automatic $27,700 deduction.
Speaker 3:For single and married filing separately taxpayers, it's $13,008.50. And then for head of household taxpayers, it's $20,800 for 2023. So if depending on your filing status, you get an automatic deduction from your income, from your adjusted gross income of one of those three figures. That's our starting point.
Speaker 2:And not to interject too much again, but let's let's backtrack a little bit. You you mentioned those three filing statuses. So not diving into them again in any detail. Obviously, there's single, married, filing separately. So That's one category.
Speaker 2:Yep. So you're married. You're filing separately, individual. Then you're married jointly. So you're filing together, obviously.
Speaker 2:What's head of household for those that don't know what that means?
Speaker 3:Head of household is a special filing status for someone typically that's unmarried but has qualified dependents. So that's definitely a topic for another show.
Speaker 2:Perfect. Perfect. I just wanna clear that up in case somebody didn't know what it was. Here we go. Kinda rolling out good show topics as we go along.
Speaker 2:But Alright.
Speaker 3:So let's get back to business here. Standard deduction, we told you the amounts. Very easily easily accessible online. You get that standard deduction no matter what. You also, as a taxpayer, you could either be filing with someone else or individually.
Speaker 3:You get to add up other deductions, which we call itemized deductions. Itemized deductions are reported on a form schedule a that is attached to your tax return. And if your itemized deductions exceed the standard deduction, then you will enjoy taking those itemized deductions and offsetting your taxable income. So whichever one is higher is the one that's you're going to take, and that's on a federal tax level. States not all states conform with federal tax.
Speaker 3:There are some states that give you credit for itemized deductions. Most states just give you a standard deduction. But this is a this is a show that's focused on the federal taxation. So think about it like that before we start diving into these bags of clothes and all the all the frequently asked questions that we give. You either get the standard deduction or you get the itemized deduction, whatever is better.
Speaker 3:If you have the itemized deductions, you file a form schedule a and attach that to your personal tax return, and that's on a year to year basis. It's important to show topic today, not only because of the question we had in TTF, but, also, this is the time of year you start collecting your tax documents to determine what you need. And what I see a lot are people that spend a lot of time collecting documents that really won't help them or deductions that won't help them on their tax return. Because you as you know, Johnny t, one of the three laws of teaching tax flow is that cash flow does not equal tax flow. And let's talk and we're gonna dive back in your buddy that gave away those generous they gave away those bags of clothing.
Speaker 3:But what we have to determine is what's the tax benefit of that deduction. And it it could very well be nothing. Just because my take one one of my main takeaways from from this podcast is that just because just because something's tax deductible doesn't mean that's gonna reduce your tax. Because it doesn't mean that you're actually gonna take it as a deduction because you might take the standard deduction. And with the tax cuts and jobs act of 2017, that standard deduction for married filing joint and surviving spouse filers is $27,700.
Speaker 3:The other very important thing to understand is that under the Tax Cuts and Jobs Act of 2017, what we call in the business your SALT tax, state and local income taxes, that deduction is limited to $10,000 if you're married jointly or 5,000 unmarried.
Speaker 2:So you could donate a $20,000 vehicle, but you far exceeded what that cap is?
Speaker 3:Not exactly. That a donation is a different category of different type of itemized deductions. We're specifically talking about taxes that you paid. So let's say you are a California resident. You have $400,000 of income.
Speaker 3:You probably paid about $35,000 of California state tax. Before the tax cuts and jobs act, that $35,000 would be a deduction on your federal tax return. Now that deduction, assume you're married, is only $10,000 And that means state income tax, state sales and use tax, property tax on personal residences. That category is only is capped at 10,000 because of that cap. That means that your other deductions would have to exceed if you're married over about $18,000 for you to itemize your deductions.
Speaker 2:Then I'm sure that's that's one of the questions that a lot of people may have. Actually, they probably don't have that question because there's probably a lot of misunderstanding around that. Right? Like, obviously, a a deduction is not a credit, which is a whole another
Speaker 3:Right.
Speaker 2:Topic. So
Speaker 3:Well, the and that dovetails right into what we wanna talk about today next. And that's a great point. Remember, cash flow does not equal tax flow. So let's talk about the situation where we had one of our one of our members generously donate several bags of clothing and household items. Okay?
Speaker 3:First of all, it's good that he it's good that he donated them. There's an there's a nonfinancial benefit to that. So I don't wanna just gloss over that. The feel goods.
Speaker 2:The the main deals.
Speaker 3:All the feels. Yes. So in this situation, he will get a when you donate noncash items, you get the, you're going to get a deduction for the fair market value of those items. It doesn't matter how much he paid for those items. The fair market value of those items, the rule of thumb is gonna be about 60 to $70 per bag or maybe 20% of the retail value.
Speaker 3:That being said, there are several resources
Speaker 2:that
Speaker 3:you can find, especially the Goodwill and, Salvation Army. We that if you take the time to itemize everything that you donated, the deduction is gonna be greater. Okay? So let's make a couple assumptions. Let's say that this gentleman donated $4,000 worth of worth of items, which is a significant amount.
Speaker 3:There are special rules if you donate more than $5,000 and and and other noncash items, like I said, for air you know, airplanes, boats, cars, planes, trains, and automobiles. There's appraisals needed. But let's assume he has legally and actively donated $4,000 worth of what with the worth of items. And let's say that he does have the proper receipt. I actually encourage people to take pictures, I mean, of their vehicle showing those bags of clothing.
Speaker 3:But let's assume he has a $4,000 deduction. John, you were a % correct when he said that does not mean that he's going to reduce his tax by $4,000.
Speaker 2:You're not walking away with a, you know, check, you know, in your mind where, oh, it's, no, I'm I I'm gonna get this money back or go, I I dropped off one bag and I'm gonna regardless what people think. I'm gonna tell them that it was worth $4,000. Obviously, there's there's some morals involved in that as well, but I think that's really an important piece because I know I I mean, I remember us talking about this multiple times back in the day, and I do hear it come up a lot, just the difference between those. Right?
Speaker 3:Absolutely. So let's assume that this gentleman donated $4,000 worth of clothing and household goods. The first thing you have to look at is, does this gentleman take the standard deduction or itemize? From a federal tax perspective, if he takes the standard deduction, John, this is your this is a quiz. Mhmm.
Speaker 3:How much tax would he be reducing by donating the $4,000 of clothing?
Speaker 2:The standard deduction?
Speaker 3:If he takes the standard. Yeah.
Speaker 2:He wouldn't do anything. Right?
Speaker 3:Dang. You're getting good.
Speaker 2:I'm hanging out with smart people.
Speaker 3:So he would get no tax benefit?
Speaker 2:He would actually I mean, not not to not to pull from the the feels, but maybe you could do something. I mean, not to say, oh, I'm a drop it off and and do good. You don't wanna throw stuff in the garbage obviously, but there's time invested in that. And, you know, we don't want people to think, right, that you're gonna you're gonna be benefiting financially from this if you take your standard deduction.
Speaker 3:Exactly. So if yes. If he donated, he takes the standard deduction, there's no tax benefit. If he itemizes his deductions and he's in the 22% marginal tax bracket, okay, then what would happen is he would receive a tax benefit. If it was $4,000 at the 22% marginal tax bracket, he would see a tax deduction or tax benefit of $880.
Speaker 3:So that is significant. That might be worth not having a garage sale. Okay? So and then if he's somewhere in the middle, sometimes those donations can boost you over that limit. So there you get a partial tax benefit, which which brings me to another point when you talk about itemizing deductions.
Speaker 3:I wanna gloss over what are the typical itemized deductions. A lot of taxpayers that we call around that bubble of itemizing versus taking the standard deduction do something called bunching deductions. So let's say they tied or they give away noncash donations, and they might give away a lot more of an even year. And then nine years, they don't give away as much to save the standard deduction. Same with paying your property taxes at times.
Speaker 3:You're a cash basis taxpayer. So you get the deduction when you either made the contribution or paid the real estate tax.
Speaker 2:So you mentioned a noncash donation. So what if, like charity events? That's one thing. Doing auction items. How how does that play?
Speaker 2:And I know I know that's kind of a different different avenue. So maybe we save that one for you.
Speaker 3:No. We can address it. That's fine. You you can maybe see my eyes rolling, through the microphone right now.
Speaker 2:I'd bust out a light saber and just whack me
Speaker 3:down. I'm sure my wife would enjoy, she can envision envision my eyes rolling. So the thing is if you don't if you go to a charity event and you pay a significant amount of money to attend, a portion of that's going to be tax deductible. You have to reduce the economic value received. So most legitimate charities are going to on your ticket, say, it it was a $500 a seat.
Speaker 3:The meal valued at a hundred and $50. The deductible portion of this event is $350. So you have to reduce that the economic value received.
Speaker 2:Because it's it's not a, again, it's not a one to one. You're not come to come to December. You're in an event, and you're like, well, I'm I'm gonna give away $10,000, and I'm just gonna pay $10,000 less in taxes anyway.
Speaker 3:Exactly. The tax flow versus cash flow. So itemized deductions, medical and dental expenses out of pocket, those that counts as an itemized deduction. But, again, only the amount that exceeds seven and a half percent of your income. 10,000 up to $10,000 of state local income tax, your mortgage interest is deductible as an itemized deduction.
Speaker 3:Does now there are some limitations, so definitely talk to your tax professional based on the amount of the mortgage, in in amount of the acquisition debt. For the vast, vast majority of people, they can deduct a % of their mortgage interest. There are some people that have larger mortgages, $750,000 in general or more, that those are limited. Your gifts to charity in general are deductible, both cash and noncash. There are some limitations for the gift of charity based on your based on your adjusted gross income.
Speaker 3:And if you similar to some of the other concepts we talk about in tax, if you gave away 70% of your taxable income and you itemize adjusted gross income and you itemize and you can only deduct 50%, that additional charitable donation moves forward into the future. Another kind of fun one would be gambling losses.
Speaker 2:Oh. Yeah. That's gonna trigger some people. I'm sure if you didn't know that. Honestly, I've never heard of this.
Speaker 2:So I I do not gamble at all. Owning your own business is like gambling every day, but let's hear about this one.
Speaker 3:So with with gambling losses, gambling losses are deductible if you itemize your deductions only up to your gambling wins. So that's a special special thing. That's an that's another I other itemized deductions. There are some other smaller, not not as well known itemized deductions to be, you know, to be concerned with. So Sure.
Speaker 3:But yeah.
Speaker 2:And this is perp and, honestly, I think this is perfect time to discuss this too because it is towards the beginning of the year. Right? Everybody wants to start off on the on the right foot. So this may be something to consider if if y'all are into spring cleaning. Right?
Speaker 2:So Mhmm. You know, garage sales come around, donations come around, you start cleaning the house, getting rid of everything. So it's good that everybody understands this, as we're going into it. So I think you did a great job of explaining that.
Speaker 3:That well, thank you. And let as we wrap this up, let's let's remember, charitable contributions and itemized deductions are reported on schedule a. They help you only if you itemize your deductions instead of take standard the standard deduction. They help you by based on your marginal tax rate. So, again, if your marginal tax rate is 12% and you gave away a hundred dollars, you'd reduce your tax by $12 if you itemize.
Speaker 3:Okay? Tax strategy comes into play when bunching deductions into certain years so that most namingly, those are gonna be tithes, charitable contributions, taxes you pay. And make sure you take a look at your tax return. Should you file the Schedule a, have that discussion with your tax professional. Most tax offer will lead you through a list of questions to determine if the itemizing is better than the standard.
Speaker 3:There are special rules for people that file married separately. And with the increased standard deduction due to the Tax Cuts and Jobs Act of 2017 and the limit on state and local income taxes, much, much many, many less taxpayers are actually itemizing than before.
Speaker 2:Excellent. Excellent. And not to not to cut it short on this too, but I do wanna mention it before we forget. Obviously, this is a question that we pulled from one of our TTF members. If if y'all, as the listeners, have any questions, really anything across the tax board, please send them to us.
Speaker 2:We love to hear them. It may actually be on our schedule for a future show or, you know, case in point with this one, we we just kinda pulled it from the bank and and we roll with it. But please shoot those over. Social media is a great option. You can always email them to hello@teachingtaxflow.com as well too.
Speaker 2:So, Chris, do you want do you have anything else you wanted to add?
Speaker 3:The last thing I want to add, you know, we love our statistics. I've mentioned the taxfoundation.org several times. Just to give you an idea based on their statistics, their most recent study, thirty point one percent of households itemize their deductions. So remember I said that many less are with the Tax Cuts and Jobs Act. Doesn't mean you shouldn't keep track of things.
Speaker 3:Doesn't mean you shouldn't be charitable or or keep track of your deductions just to give you that that tidbit.
Speaker 2:It was a great idea too just to take a picture of, you know, your trunk full of bags if you Exactly. Never hurts.
Speaker 3:And we appreciate you. Again, very, thank you for your open mindedness, your time. Please, we're doing this podcast for the for you, the listeners, to empower, to help legally and ethically reduce the tax you pay in your lifetime. Leave us a five star review, and please subscribe and follow the Teaching Tax Flow podcast. And, also, check her back on some of those previous podcasts.
Speaker 3:There might be something that piques your interest.
Speaker 2:Some great stuff. And I know we talk about a lot of the diagnosing in the color we just call it color coordinations. But the colors as far as for marginal tax rates go, a lot of the differences between things like this. So your your standard 99 deductions is good comparison. Plenty of content out there.
Speaker 2:So definitely, as Chris said, check those out and share them with your contacts. Thank you everybody for joining us once again, and we will see you next week as always.
