Charitable Giving: Maximize Tax Benefits and “Bunch” Your Charitable Contributions
The Tax Cuts and Jobs Act (TCJA) became law in December 2017. Most of the law’s changes were implemented in 2018 and are scheduled to sunset after 2025. Under the TCJA, the standard deduction nearly doubled in size. Now, for 2022 tax year, single filers may claim a $12,950 standard deduction, while married couples filing jointly can claim a $25,900 standard deduction.
Because of this substantial increase in the standard deduction, many taxpayers who historically itemized deductions may find it advantageous to take the standard deduction. However, those who are charitably inclined and find themselves on the margin between taking that standard deduction or itemizing could maximize their tax benefits by bunching two or more years of charitable contributions into one year. This can allow them to itemize deductions for the current year and take the standard deduction the following year. A donor-advised-fund (DAF) account is an easy way to implement this strategy while continuing their annual support of the causes and charities of their choice.
Case Study
How exactly does this bunching strategy work? Let’s say a married couple annually has $23,000 of itemized deductions, including $10,000 in donations to a DAF or other public charity. Because that amount is below the $25,100 standard deduction for 2021 and the $25,900 standard deduction in 2022, they could take the standard deduction each year, and over two years they could claim a total of $51,000 in standard deductions. This is shown in Option 1 in the table below.
However, the couple instead takes a more tax-smart approach, as shown in Option 2. Rather than donating $10,000 to charity each year, the couple concentrates or “bunches” two years of charitable contributions into a single year. The bunched giving creates a total of $33,000 in itemized deductions in 2021, and they take the $25,900 standard deduction in 2022. With this option, they have $7,900 of additional tax deductions over the two years. In addition, if these contributions were made to a DAF, the couple could recommend grants to charity in both years and continue their overall giving plan uninterrupted.
A DAF is a way to maximize tax benefits from donations to charity. It allows you to take multiple years’ worth of deductions in a single year. Simply put, a grantor opens a DAF account and makes an initial contribution, which can be cash, stock, mutual funds, or other assets. The DAF sponsor is a 501(c)(3) public charity, which means that the contribution is a charitable gift and therefore eligible for a deduction in the year of the gift. The grantor/account owner can then recommend grants out of the DAF to eligible recipient charities. The DAF account can be invested, and gains will not be taxable to the taxpayer, potentially adding to the pool of funds available to grant to charity in the future.
At Copper Leaf Financial we apply tax-smart giving strategies with our clients based on their specific circumstances. We can help you open a DAF so call us today at (802) 878-2731 or click here to get started.
Recipients should not act on the information presented without seeking prior professional advice. Check with your tax advisor about your specific situation or click here to reach out to our *affiliated CPA firm Davis & Hodgdon CPAs.
Written by Michael L. Thompson, CAP®, AIF®, AEP®
*Copper Leaf Financial is an affiliated and separately registered entity.