Bunching Charitable Contributions with Donor-Advised Funds
Here is something you might not have ever considered before. High-net-worth households can use the bunching technique to accomplish charitable goals while employing non-charitable itemized deductions and standard deductions (the current standard is a whopping $27,700 for persons married filing jointly). If you’re philanthropic and find yourself in between standard deduction and itemized deductions bunching multiple years together into one year could benefit you greatly.
First things first, you need to establish a Donor-Advised Fund (DAF) with a sponsoring organization to manage the assets you invest in and to recommend and maintain your charitable donations. Once you have your Giving Account you are eligible to donate assets like cash, cryptocurrency or stocks. Over time, not only are you reducing your taxes but you’re giving back to the community at the same time and setting yourself up for immediate benefits. Get the tax reduction now on the full amount of the charitable gift, let the investment returns grow tax-free inside the fund and later you make larger contributions to charities.
The simple concept of pairing your DAF with your charitable contributions is called bunching. Instead of taking the standard deduction every year, you have the opportunity to exceed it by grouping multiple years together into a single tax year provided you have a sufficient taxable income.
HOW DOES THE BUNCHING STRATEGY WORK?
Tax planning with the bunching strategy basically combines large gifts that would typically be spread from multiple years into one year to hurdle the deduction threshold. There are a myriad of avenues to bunch including: charitable gift contributions, medical expenses, business expenses, 529 education plans and even retirement plans. There are factors to help determine the most efficient time to bunch like high tax rates, selling your business or home or an increase in your income. Bunching allows you to maximize your goals so your deductions total more than the standard amount.
WOULD BUNCHING BE EFFECTIVE FOR YOU?
To best implement bunching there are a few factors to examine and there are bunching and tax saving calculators to help you determine your deductions. Take a look at three major contributing factors: your flat charitable donations, your DAF and your 529 education plan.
The DAF is especially helpful for those with over a million dollar taxable income. While maybe you normally give around $10,000 a year to charity (which is not over the standard deduction and you don’t get a tax benefit at all), you could bunch five years of gifting together into this year and give $50,000 to the DAF. You would get the full $50,000 deduction this year, then could suspend giving for a few years but still have money go from the DAF to your favorite charity in each of the next five years. Offset taxes this year and still make charitable payments in the future.
Thirty states offer charitable bunching of 529 education plans from the investment gains. There are some complex rules and stipulations as 529 plans can be used for more than tuition and the list of qualified expenses has expanded substantially. Essentially, you can make a lump sum contribution to be distributed over five years but benefit from the tax deduction in a singular year.
Bunching can be a dual win for you. Reducing your tax burden in a higher income year while providing for your favorite charity and all it takes is a little math and time management. It’s all part of the tax planning strategy of how to make your money work best for you to achieve your ultimate financial goals and aspirations.
