Reduce Taxes with Charitable Gift “Bunching”
posted Jun 18, 2019 by Dave Desmarais, CPA/PFS, MST, MBA, AEP® in the Global Tax Blog
Looking to accomplish your philanthropic goals? Changes under the Tax Cuts and Jobs Act (TCJA) may impact the tax benefits of your contributions. However, a strategy known as “bunching” can help minimize your tax obligations. Bunching involves consolidating tax-deductible charitable contributions that normally would have been made over multiple years into a single tax year. Learn more about what bunching entails here.
How did the TCJA impact charitable contributions?
Check out our blog, How will the TCJA Impact My Charitable Deductions?
Essentially, the TCJA doubled the standard deduction (dollar amount that reduces the amount of income on which you are taxed) to $24,000 for most married taxpayers, and $12,000 for most single taxpayers. Due to this attractive change, many taxpayers are less likely to itemize deductions, which poses some difficulties for charitable giving.
Donations may involve extra planning
The charitable deduction is only available to those who itemize their deductions.
The TCJA enhanced the deduction for charitable contributions by raising the limit that can be contributed in any one year. The limit is now 60% of adjusted gross income, up from 50%. So, if you still itemize, you can continue to deduct charitable contributions, but it only reduces your taxes if all your itemized deductions exceed the newly raised standard deduction amounts. Some taxpayers who have lost the value of some deductions (such as the state and local tax deduction) may make up the difference by contributing more to their favorite charity so they can continue itemizing.
How can bunching help?
Bunching several years of charitable gifts into one year can push taxpayers above the threshold for itemizing deductions in that year and provide them with a deduction for the full value of their donation. Taxpayers can give less and simply claim the standard deduction in alternate years.
Bunching involves careful planning
In the consolidated year, donors may consider directing their bunched charitable gifts to donor advised funds (DAF) that support the specific causes that matter to them. Check out our blog, Did the TCJA Impact Donor Advised Funds?
By contributing to a DAF, the donor receives an immediate tax deduction through itemizing on their tax return. Over several years, the donor would then be able to recommend grants from the DAF to qualified charities, hence allowing the donor to utilize the higher standard deduction in those years.
Consider this example:
Taxpayers who are charitable, but might not be able to itemize because they don’t have enough deductions to meet the standard deduction, should consider bunching their donations. That means donating in one year the amount that they would have otherwise spread out over 2-3 years, so they can get over the standard deduction amount. Then in the years they don’t do charity, they’ll get the standard deduction
Despite changes under the TCJA, philanthropic minded taxpayers will continue to give generously. However, don’t let valuable tax deductions pass you by through bunching!
Questions on bunching your charitable contributions? Contact our Private Client Services Team.