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How to maximize the deductibility of charitable contributions

How to Maximize the Deductibility of Charitable Contributions

Julianne F. Andrews, MBA, CFP®, AIF®
November 20, 2019

The tax law changes in 2018 dramatically reduced the deductibility of many expenses and increased the standard deduction dramatically.  However, these same tax reforms cleared the way for individuals and families to continue to support the causes they believe in while still potentially minimizing their taxes. However, this new approach requires planning ahead and an understanding of how “bunching” deductions work.

The Tax Cuts and Jobs Act of 2017 (TCJA) increased the standard deduction for those filing jointly to $24,400 in 2019 and $12,200 for those filing a single return.  In addition, the TCJA put a cap of $10,000 on the deductibility of state and local income taxes (including real estate taxes).  The combined effect of these two changes will mean that many more taxpayers will use the standard deduction moving forward instead of itemizing.  However, the only way to deduct charitable contributions, is to itemize.  So, what is the solution if you want to continue to support your favorite charities year after year?

By “bunching” deductions and funding two (or more) years of charitable giving in a single year, taxpayers may be able to choose to itemize deductions in alternating years and use the standard deduction in other years. The following charts show how charitable donations and itemized deductions work. The first chart shows the tax impact without bunching, while the second features the tax advantages associated with bunching:

Itemized Deductions – without Bunching (Married Filing Jointly)

  Limited State Income and Real Estate Taxes Charitable Contributions Allowed Itemized Deductions Standard Deduction
Year 1 $10,000 $10,000 $20,000 $24,400
Year 2 $10,000 $10,000 $20,000 $24,400
         
Total Deductions over Two Years

($24,400 x 2)

      $48,800

Itemized Deductions – with Bunching (Married Filing Jointly)

  Limited State Income and Real Estate Taxes Charitable Contributions Allowed Itemized Deductions Standard Deduction
Year 1 $10,000 $20,000 $30,000 $24,400
Year 2 $10,000 -0- $10,000 $24,400
         
Total Deductions over Two Years

($30,000 + $24,400)

      $54,400

Although bunching contributions does create higher deductions, those who have consistently given to charities on an annual basis, may be concerned about making a substantial donation one year and giving no support to their causes the following year. However, establishing a donor-advised charitable account provides a tax deduction in the year the money was set aside while allowing the donor to specify when the funds are to be distributed. Funds residing in the donor-advised account can be invested (for preservation or growth) while they await distribution. Donor-advised funds (DAFs) offer charitable givers a way to make annual donations to the charities they support and reap maximum tax advantages at the same time.  DAFs are easy to open and generally require an initial minimum contribution of $5,000.  Once established, most DAFs can accept as little as $500 and can distribute grants as low as $50.

For more information about how you could benefit from a DAF, consult your financial advisor and your tax professional to help make sure you are able to support your favorite charities and take maximum advantage of the tax savings available to you.

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