Changes to the tax law this year may impact your decisions regarding 2025 income taxes. For 2025, the standard deduction increased to $15,750 for individuals and $31,500 for married couples. Because of the size of the standard deduction and the limits on other deductions (notably deductions for state and local taxes, which had been limited to a total of $10,000), taxpayers have previously had a decreased incentive to “itemize.” Under new changes applicable to tax returns beginning with 2025, taxpayers should review the opportunity to “itemize” deductions with the goal that the combination of itemized deductions for state and local taxes, charitable gifts made, and mortgage interest (if applicable) exceeds the amount allowed as a standard deduction for 2025 tax returns.
As is typical when Congress changes the tax law, the new rules are complicated in practice, and each taxpayer should consult their personal tax advisor as to the optimal way to file their income tax returns. But note that while the filing date for personal tax returns is not until April 15th of next year, the decisions you make in November and December of this year will establish the “facts” of your possible allowable 2025 tax deductions. This is because individual taxpayers are on the cash method of accounting. This means that to claim a tax deduction for 2025, you must make a payment by December 31, 2025. In the case of a gift of appreciated stock to a charity, the gift must be completed by December 31, 2025.
How the New Tax Rules Change Tax Planning for Itemized Deductions
Beginning for tax year 2025, for taxpayers with an adjusted gross income of less than $500,000 (but subject to phaseout for adjusted gross incomes above $500,000), the cap on state and local itemized deductions has increased to $40,000 from the prior limit of $10,000. As an example, consider a taxpayer with $15,000 of real estate taxes plus $25,000 of state and local income taxes paid ($40,000 total tax bill). Under the prior law, the taxpayer who itemized their deductions was limited to deducting only $10,000 of those taxes that they paid. But under the 2025 rules, the taxpayer would be eligible to claim itemized deductions for $40,000 of state and local taxes. Since that amount is greater than the 2025 standard deduction amounts, the taxpayer should choose to itemize deductions. In these facts, if the taxpayer also makes charitable contributions in 2025, all the charitable contributions made in 2025 will reduce taxable income and save the taxpayer federal tax dollars.
This means that taxpayers who pay state and local income and property taxes plus mortgage interest at or near the amount of the standard deduction may want to consider itemizing in 2025 and make charitable contributions in 2025 to maximize their 2025 federal tax deductions.
Note that for tax years after 2025, the charitable contribution rules change and establish a “floor” before taxpayers may itemize charitable contributions. This means that itemizing taxpayers cannot deduct charitable contributions until their charitable contributions exceed 0.5% of their adjusted gross income. In 2025, taxpayers are not yet subject to the “floor” for charitable contributions, and charitable donations are subject to the existing rules. Because the “floor” has not yet taken effect, taxpayers may consider making larger charitable contributions in 2025. To the extent these charitable deductions go unused in 2025, the deductions can be carried forward. This strategy is called “bunching.” To the extent “bunching” makes sense for you, please consult with your tax advisor.
Also note that the prior tax law about contributions of appreciated stock to a charity remains unchanged. So, if a taxpayer has low basis stock with a significantly higher market value, the taxpayer can contribute that stock “in-kind” (i.e., without selling it) to the charity. In such a case, the taxpayer can claim a charitable deduction equal to the market value of the stock on the date of contribution without having to pay any income tax on the built-in tax gain. As an example, if the taxpayer held public stock that they had purchased for $100 per share with a market price of $250 on the date of contribution, the taxpayer could contribute, say, 100 shares to the charity. The charity would sell the stock for $25,000, and the taxpayer would get a tax deduction of $25,000. The difference between the market price and the cost basis of $100 per share would not be taxed.
While everyone’s individual tax situation is different, itemizing may make sense for you. As such, please consult with your tax advisor before taking any tax positions.
For more information or to seek counsel from our Taxation practice group, please reach out to request a consultation or call us at 216-696-1422.
