The Tax Cuts and Jobs Act (TJCA) was signed into law in 2017, eliminated some itemized deductions, and capped others on personal income tax returns. The standard deduction nearly doubled, and indexing has increased it this year to $12,950 for a taxpayer filing single and $25,900 for married filing jointly. Many people cannot itemize their deductions with this much higher standard deduction. For charitably minded individuals and families who don't quite make the cutoff to itemize, a bunching strategy could make charitable giving tax effective once again.
Charitable bunching is when you group the contributions you intend to make over a period of years into one large donation to a Donor Advised Fund (DAF). In the year you make your "bunched" donation, you will be able to itemize your tax return and enjoy a larger deduction. In the years you do not bunch contributions, you will continue to make regular donations to your favorite charities through your DAF and claim the standard deduction on your taxes. This method allows you to continue to support your favorite charities while maximizing the tax benefit of your charitable contributions.
Here's a simple example of how it all works. Let's pretend Bess and Harry Truman give around $7,000 a year to their favorite nonprofits like the Harry S. Truman Presidential Library and Museum and the Girl Scouts. With mortgage interest on their Independence home at $8,000 and Missouri state and property taxes at $10,000, they fall just below the $25,900 joint filing amount for itemizing. In this scenario, Bess and Harry can only take the standard deduction.
However, they could see substantial tax savings if they bunched their charitable giving into one year. If they bunched three years' worth of donations, or $21,000, and deposited it into their DAF, they would receive an additional $13,900 in tax deductions that year. And instead of writing out a donation check for every gift, they can simply schedule donations to be distributed out of their fund on a schedule that works for them. The community foundation sends the donations and manages all the paperwork.
A DAF is such a simple, flexible, and tax-efficient way to support your favorite charities. With as little as $5,000, you can start a Donor Advised Fund and start growing your giving tax-free. Our Truman Heartland Community Foundation team would be pleased to help you maximize the impact of your charitable giving.