Atlanta Financial Blog

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.

Share This:

Share on facebook
Facebook
Share on linkedin
LinkedIn
Share on twitter
Twitter
Share on google
Google+

The CARES Act (Recently Passed Stimulus Bill)

As you likely have heard, in response to the unfolding COVID-19 global pandemic, Congress has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the President signed it into law on March 27, 2020. It is a $2 trillion emergency fiscal stimulus package designed to help ease the impact of this health crisis on American workers, businesses and the economy. At Atlanta Financial, we have summarized the new law for you and tried to answer some frequently asked questions we hear from individuals as well as business owners.

Read More »

Federal Income Tax Filing & Payment Deadline Extended

In light of current events and potential financial difficulties caused by the COVID-19 outbreak, the Internal Revenue Service (IRS) has postponed the 2019 federal income tax filing and payment deadline until July 15, 2020. [1] [2] [3]  Federal income tax payments due on April 15 2020 are now due July 15, 2020 without penalties and interest regardless of the amount owed (up to $1,000,000 for individuals). Taxpayers do not need to file an extension unless they need additional time beyond the July 15, 2020 deadline.

Read More »