Many individuals who have a history of charitable giving may find themselves in an unfamiliar situation this year due to the new tax law. Under the new law, the standard deduction that can be subtracted from your taxable income without itemizing will increase to $12,000 for individuals and $24,000 for married couples. Tax planning experts are recommending that charitable individuals consider a new strategy called “bunching” when creating their charitable giving plan.
So how does “bunching” work? In practice bunching simply means that you “bunch contributions” into one tax year so you can exceed the standard deduction and then in the next couple of tax years you take the standard deduction. One approach would be to make three years’ worth of contributions to your church and other charities you support in the current year and then not make contributions the following two years and take the standard deduction during those two years. This may work well for you tax-wise, but for the charities you support it may cause some budgeting challenges.
An alternative is a charitable giving tool that a number of charities provide (including the Truman Heartland Community Foundation) that can assist you with a bunching strategy that won’t create budgeting challenges for your favorite charities. That tool is a Donor Advised Fund, your charitable giving savings account.
For example, let’s take a couple who has deductions of state and property taxes and mortgage interest deduction that total $15,000 per year. They are currently making charitable contributions of $7,000, and their total itemized deductions total $22,000. Since the standard deduction is $24,000, they will not be able to itemize this year. However, if they put three years’ worth of contributions or $21,000 into their Donor Advised Fund they would then have $36,000 in itemized deductions and could itemize and receive additional tax savings. Then over the three years they would make their typical $7,000 annual contributions to their favorite charities from grants out of their Donor Advised Fund. In the next two tax years they would take the $24,000 standard deduction when filing their taxes. By utilizing their Donor Advised Fund they can benefit from an additional $12,000 in deductions that they otherwise wouldn’t have been able to take.
A Donor Advised Fund is an efficient way to create your own Family Foundation. It is much more cost effective than creating a private foundation and can be established with an initial gift of $5,000 or more (minimum at THCF). When you make contributions into your Donor Advised Fund you receive a charitable contribution immediately and then you can make grants to nonprofits out of your fund at a later time. As the example showed, it can be used as an important tax planning tool for a charitable couple who may not have itemized deductions exceeding $24,000 each year. By bunching two or three years’ worth of contributions in one calendar year they may be able to exceed the standard deduction and receive additional tax savings and still maintain their annual support to their favorite charities.
– Phil Hanson is president and CEO of the Truman Heartland Community Foundation, based in Independence.