Broker Check

Most Popular Strategies from New Tax Code: Bunching Charitable Contributions Part 3

| January 22, 2020

Most Popular Strategies from New Tax Code: Bunching Charitable Contributions

Part 3 of 3

The Tax Cuts and Jobs Act (TCJA) tax bill will be in its 3rd year in 2020, for a total of only 7 years. The new tax law has created a very generous standard deduction that dramatically increased from prior years. For 2020, those aged 65 and over had a standard deduction of $27,400! This means that unless your itemized deduction exceeds that amount, you will get the full standard amount. For most of us, that threw itemization out the window.

However, if you are close to the itemized standard deduction line and you have made charitable contributions in the past you might want to consider “Bunching” your charitable gifts. Bunching your gifts simply means making a few years’ worth of contributions in one year, in order to receive a higher deduction and push you over the standard deduction amount to get the tax benefit for your gift. If your typical annual gift amounts don’t push you over the standard deduction threshold mentioned above, then you don’t receive any tax benefit for the gift. This likely was the main reason that you made the gift in the first place but it’s nice to get the tax break if you can structure it accordingly!

As far as we see it your bunching can take on two forms:

Version 1:

The first method of this would be to make your larger gift directly to the charitable organization in a single year. You could let them know that this year would be a larger gift amount but then there might not be a gift in the subsequent few years. For example, if you regularly gave $2,500 in charitable gifts, you could make a single year gift of $7,500 (if the funds were available). This increased amount could push your itemized expenses over the standard deduction amount and give you the tax break you deserve.

Version 2:

The second method of this would be making the above-mentioned larger gift in one particular year to your own Donor Advised Fund (DAF) instead of to the charity outright. By making it to the DAF you still get the full gift amount, but you don’t have to turn it over to the charity. If we are using the numbers above, you would make the $7,500 gift to your DAF, but you would only send out $2,500 from the DAF each year for the next 3 years. This would ensure that the charity continues to receive the annual amount they are used to. This would also help to make sure the charity continues to run itself properly and deserve the future amounts from your DAF.

Whatever form of “bunching” you decide to take on, first check and make sure that it will in fact make a difference come tax time. Also remember from ‘Part 2’ of this series that if you have an IRA consider making the gift directly from the IRA account!