According to the IRS, more than 36 million people offset their 2015 tax bills by taking charitable-giving deductions. The new Tax Cut and Jobs Act passed by congress and signed into law in December increases the standard deduction that taxpayers can claim from $6,350 for single filers and $12,700 for those filing jointly to $12,000 and $24,000 respectively. Many feel that increase may lead to fewer taxpayers itemizing and a potential drop in charitable giving. But there is a way for charitable-minded individuals to continue to make gifts and get the tax breaks they’ve come to enjoy. It’s what accountants call “Bunching.”
“Bunching” is when you take the amount you would typically give to your favorite charities over multiple years and make the gift at one time to a Donor-Advised Fund (DAF), writing the contribution off your tax bill. Then, in alternate years, take the standard deduction on your taxes. The strategy could be quite effective in lowering your tax burden under the new tax law.
Outside of charitable contributions, taxpayers are allowed the following deductions: up to 7.5% of your adjusted gross income for medical and dental costs; up to $10,000 in state and local taxes including income and property tax (SALT); mortgage interest up to $750,000 for homes purchased after December 15, 2017; and up to $1,000,000 in mortgage interest for homes purchased before that date can be deducted from your federal tax bill. But filers who still fall below the standard deduction threshold after subtracting items from the qualified list can still meet or exceed the standard deduction amounts by increasing their charitable giving.
Example: On their 2018 tax filing, a married couple claims the maximum SALT deduction of $10,000. This couple also paid $2,000 in eligible mortgage interest in a year which is also tax deductible. To surpass the $24,000 standard deduction, they would have to make a charitable contribution of more than $12,000. If the couple usually makes $7,500 in charitable donations within the year, they can contribute double that amount ($15,000) to a Donor-Advised Fund and increase their tax deduction by $3,000. That couple could then take the standard deduction on their 2019 taxes.
As for the charities that normally benefit from their philanthropy, a DAF lets the couple recommend grants over the next two years to the very same organizations who would receive them annually.
While bunching deductions usually only helps taxpayers every other year, getting tax breaks on alternate tax filings beats missing out on them altogether. Additionally, most of the changes applicable to individuals in the new tax law expire after 2025, so this bunching strategy may not be needed for the long term.
If making charitable contributions of multiple years puts a strain on cash flow, consider making the gift of other assets like stock, realestate or even cryptocurrency like Bitcoin to your DAF the first year. All are acceptable donations into a DAF and all are tax deductible at the time of the gift.
Bunching is not a new concept. Taxpayers who have been near the previously lower standard deduction have been bunching their charitable giving, property taxes and income tax for some time. The new tax bill simply increases the number of people who this could benefit.
Contact us to find answers to any of your other charitable planning questions.
