According to the IRS, more than 12 million people offset their 2022 tax bills by taking charitable-giving deductions.
Tax Cuts and Jobs Act changes
The Tax Cut and Jobs Act passed by congress and signed into law in 2017 increased the standard deduction that taxpayers could claim from $6,350 for single filers and $12,700 for those filing jointly to $12,000 and $24,000 respectively. Since then, the standard deduction has increased to $14,600 for single filers and $29,200 for joint filers in 2024.
Impact on charitable giving
Many feared that increase would lead to fewer taxpayers itemizing and a potential drop in charitable giving. Statistics show that it did not cause a significant drop in charitable giving, in part due to strategies like “Bunching”, which allows charitable-minded individuals to continue to make gifts and realize tax benefits from their giving.
“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.
Other tax deductions
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.
Donor scenario
On their 2023 tax filing, a married couple claimed the maximum SALT deduction of $10,000. This couple also paid $4,700 in eligible mortgage interest, which is also tax deductible. To surpass the 2023 standard deduction of $27,700, they had to make a charitable contribution of more than $13,000. Since the couple usually makes $8,500 in charitable donations within the year, they doubled that amount ($17,000) and contributed it to a Donor-Advised Fund, increasing their tax deduction by $4,000. That couple could then take the standard deduction on their 2024 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.
Benefits of donor-advised funds
While bunching deductions usually only helps taxpayers every other year, getting tax breaks on alternate tax filings beats missing out on them altogether. The TCJA is currently set to expire after 2025, so this bunching strategy may not be needed for the long term but could offer significant benefits between now and then.
Alternative asset donations
If making charitable contributions of multiple years puts a strain on cash flow, consider making the gift of other assets like stock, real estate 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. They may even offer additional tax benefits through avoidance of capital gains taxes.
As we move closer to the sunset of the TCJA, it will be important to understand what changes will take place and how it will affect individual tax filing. Sign up for Ren’s Philanthropic Insights newsletter and blog to stay ahead of what’s happening.
Contact us to find answers to any of your other charitable planning questions.
