As we launch into tax season, what better time to assess whether you've been managing your deductions in a tax-advantageous manner? It's been a couple of years since the Tax Cuts and Jobs Act of 2017 (TCJA) nearly doubled the standard deduction to $24,000 for a married couple and $12,000 for a single person. As a result, many taxpayers who were itemizing deductions are now taking the standard deduction. But despite initial appearances, taking the standard deduction might not always be the best approach. Please be sure to review your specific situation with a financial planner and/or tax consultant.
Some charitably inclined individuals who are on the fence between itemizing and taking the standard deduction are enjoying the best of both worlds by taking advantage of a technique known colloquially as “bundling.” Through bundling, individuals condense two or more years’ worth of charitable giving into a single tax year and itemize to gain the maximum tax benefit, then take the standard deduction during other years.
For example, Jane and Bob currently give a total of $12,000 to their alma maters each year. The couple has an additional $11,000 in other itemized deductions. If they continue to donate $12,000 each year, their total annual itemized deductions of $23,000 do not exceed the $24,000 standard deduction for couples filing jointly.
Jane and Bob could take the $24,000 standard deduction year after year, but that’s not the most financially advantageous approach. They should consider bundling.
As illustrated below, by taking the tax-smart approach of bundling two years’ worth of giving ($24,000) into a single year, Jane and Bob can gain $11,000 of additional tax deductions over a two-year period!
Bundling Giving into a Donor Advised Fund vs. Giving Directly
Many donors who go the route of bundling charitable donations establish a Donor Advised Fund (DAF) to facilitate their giving. Through a DAF, donors can contribute assets into their named account, get an immediate tax deduction, invest and grow DAF assets tax-free, then suggest grants out of the fund to support the charities of their choosing over time. DAFs can be used to make grants to any nonprofit 501(c)(3) charitable organization anywhere—including nonprofit schools, houses of worship, or other charities.
It would make sense for Jane and Bob to establish a DAF rather than giving directly to their schools, because they can bundle $24,000 of charitable donations into their DAF every other year while seamlessly granting $12,000 out of the fund annually to support their alma maters. The couple and their schools thus avoid the budgeting and communication challenges that could arise if Jane and Bob suddenly shifted to giving a larger amount directly to their schools in alternating years. By bundling their giving into a DAF, Jane and Bob are able to provide seamless support to their favorite charities while making the most of the tax reform.
As always, The Columbus Foundation is here to make your giving as effective and easy as possible. Contact us if you’re interested in learning how we can assist you or your clients in taking the most tax-advantageous approaches to charitable giving.
About The Columbus Foundation
The Columbus Foundation serves nearly 3,000 individuals, families, and businesses that have created unique funds and planned gifts to make a difference in the lives of others through the most effective philanthropy possible. The Columbus Foundation is Your Trusted Philanthropic Advisor® and is one of the top ten largest community foundations in the country.