Boston - A lot of questions surround the potential changes to the U.S. tax code. One thing is certain, however. As long as standard deductions remain high, with fewer taxpayers who are able to itemize, bundling charitable deductions can still be an effective tool to maximize tax savings into a single year.
The Tax Cuts and Jobs Act of 2017 stripped or limited many deductions from the tax code, while also nearly doubling the standard deduction in the past couple of years. In 2021, the standard deductions are $12,550 for singles and $25,100 for joint filers.
Bundling charitable deductions for potential tax savings
Bundling charitable deductions may help taxpayers accumulate enough itemized deductions to exceed the standard deduction for one year, and then claim the standard deduction in the years when the donations are dispersed to charities.
Let's illustrate a hypothetical example of bundling. Instead of donating $2,000 a year for five years, a married couple filing jointly could make five years' worth of contributions (or $10,000) in a single year. In that case, their itemized deductions would total $32,000 ($12,000 mortgage + $10,000 state tax + $10,000 charitable). That would exceed the standard deduction of $25,550 by $6,450.
Assuming a 37% marginal tax rate, this $6,450 additional deduction would produce $2,386 in tax savings. Thus, the couple would incur a net outlay of $7,614 ($10,000 - $2,386) instead of the net outlay of zero if they had contributed $2,000 per year for five years.
Managing charitable distributions with donor advised funds
Taxpayers considering this bundling might not want their charities to receive five years' worth of contributions at once. Or they might wish to change the charitable recipients in future years. To meet these concerns, taxpayers could consider combining this strategy with a donor advised fund (DAF).
Contributions to a DAF are deductible when made. But the DAF is not required to distribute the proceeds to charities immediately.
Instead, the DAF could dole out the funds in succeeding years. (Of course, the taxpayer does not receive a second deduction when the DAF distributes the funds.) The taxpayer can even change the charitable entities that receive the DAF disbursements along the way.
Bottom line: Bundling charitable deductions using a DAF helps taxpayers maximize their tax savings and benefits in a single year. The DAF can distribute gifts over time, while the taxpayers can take the higher standard deductions in subsequent years.