Save Taxes by "Bunching" Your Charitable Donations
New Tax Reforms
Several tax reforms in the December 2017 Tax Cuts and Jobs Act will impact individual tax filers beginning in 2018. Three of the most impactful are:
- the limitation of property and state income taxes deductions to $10,000 each year
- the elimination of personal exemptions
- the almost doubling of the standard deduction, increasing the amount to $12,000 for singles and $24,000 for married couples filing jointly.
With the new limit on property and state income taxes and higher standard deduction levels, many tax filers who have itemized their deductions in the past will find it more beneficial to use the standard deduction.
If your itemized tax deductions are below the new standard deduction level, you may want to consider “bunching” your charitable deductions so you can itemize your deductions in a specific year. “Bunching” is when you donate charitable contributions for a two or three year period in a single year to raise your itemized deductions above the standard deduction level. This allows you to itemize your tax deductions in one year and potentially use the standard deduction in the next year.
Under the new law, the deduction for charitable giving is limited to 60% of your adjusted gross income for cash gifts. If your charitable giving exceeds this amount, you can carry the excess donations forward for up to five years.
Donating to your favorite charity?
Avoid these 5 mistakes so you can give more and make a greater impact on the organizations and causes you support.
Read How John and Jane Make the New Limit Work for Them
John and Jane are married and are claiming the maximum property and state income tax deduction of $10,000. If they pay $5,000 in mortgage interest this year, they’ll need at least $9,000 of charitable donations or other itemized deductions in order to exceed the new $24,000 standard deduction for married couples filing jointly. If John and Jane normally donate $5,000 per year to their favorite charities, they won’t meet the threshold to make it advantageous to itemize deductions.
To maximize the deductibility of their charitable donations, John and Jane could “bunch” their donations by donating $10,000 or $15,000 (two or three years’ worth of charitable donations) to their charities in a in a single year. Doing this will allow the couple to deduct the full amount they donated and allow them to itemize their deductions. In the following year or two they could then use the standard deduction when their deductions are lower.
The Donor Advised Fund Alternative
When considering the possibility of “bunching” charitable donations you might not want to give two or three years’ worth of charitable gifts in one year and then nothing or a lower amount in the following years. One way to maintain your charitable giving levels and plan to “bunch” your charitable donations is to use a donor-advised fund or DAF.
A DAF is a fund established with a charitable organization or community foundation that allows a donor to make donations or cash or appreciated investments whenever they want and then decide later as to when and what charities will receive the funds. By donating appreciated investments to a DAF, you are able to sell the investments inside the DAF without paying capital-gains taxes. In addition, you are able to use the full market value of the investments as your charitable deduction. Once the funds or investments are donated to the DAF, there is no requirement as to when you must grant the funds out to charities. Therefore, a DAF is a great option to receive your “bunched” charitable donations that you would like to donate to organizations or causes in future years.
With the example of Joe and Jane, by making a $10,000 or $15,000 donation to a Donor Advised Fund, the couple is able to support the organizations and causes they care about on the same $5,000 per year level as they have in the past while “bunching” their charitable deductions to itemize their deductions in a single tax year. The following year they would not have a charitable deduction, so they would use the standard deduction while still being able to continue their charitable giving from the DAF.
As you look ahead at your charitable giving, consider using appreciated investments to eliminate the potential capital gains and “bunch” your gifts to help increase your annual tax deductions.
We can assist you in making your giving easy. Contact our office for more information on how you can establish a donor-advised fund and donate appreciated investments without capital gains taxes.
As always, please consult your tax advisor to make sure your charitable giving is planned according to your individual circumstances.
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Use this guide to learn the 5 mistakes you could be making when giving to charities and how to avoid them.
About Greg Hammond, CFP®, CPA
Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.