Changes to the tax code two years ago sparked a new trend in charitable giving: “bunching” your donations.
For 2020, the standard deduction has increased again ($12,400 for singles and $24,800 for married people who file jointly). The elimination of the personal exemption and the $10,000 annual limit on deductions for property and state income taxes. Before the Tax Cuts and Jobs Act of 2017 took effect, about 49 million taxpayers itemized deductions on their tax returns and about 37 million of those people claimed charitable gifts as a part of those deductions.
Bunching as a Strategy
Here’s what you need to know about “bunching” your charitable gifts: The charitable giving deduction remains for taxpayers that itemize. Under the new law, this tax break is limited to 60 percent of adjusted gross income for cash gifts, however you can carry forward by as many as five years any sum that exceeds that. If your itemized deductions fall below the new thresholds, “bunching” may be a strategy for you.
For example: a married couple claiming the maximum annual real estate and state income tax deduction of $10,000, plus $6,000 in mortgage interest will need at least $8,000 of charitable giving as a way to reach -- and exceed -- the new $24,800 standard deduction threshold. If this couple typically gives $4,000 to charity yearly, then they would benefit from accelerating their giving by “bunching” several years of contributions into one tax year. This would allow them to itemize on their taxes one year and then take the standard deduction the next. Pooling charitable gifts on alternating years can maximize tax savings via itemized deductions.
Consider a Donor Advised Fund
But what happens to your favorite charitable organizations since they will not receive your annual donations? A donor advised fund (DAF) may be the answer. With it, you can still make monetary donations while also taking tax deductions for them in the same year. Your contributions will be paid to your chosen charities over time.
For example, you can bunch the donations for several years into a donor-advised fund into a single year. You can then take the tax deduction while the fund managers pay out your gift in equal amounts over a few years. Your selected charities will then still receive the same amount every year even when you didn’t itemize the donation in your tax return.
You don’t have direct control over your donation when you deposited it in the donor-advised fund. Instead, you can tell the fund manager which charities you want to make the donations to and what amount each one will receive every year. You may also find that your money was invested so your donations may potentially increase.
Questions?
Contact David Toll, JD, senior associate vice president, in Drexel University’s Office of Gift Planning at (215) 895-1882 or giftplanning@drexel.edu.