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Bundling charitable deductions may yield significant tax savings

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      By Dan R. Strelow, CFA, CIPM, Portfolio Manager, Global Income Group, Eaton Vance Management and Eileen Tam, Product Manager Wealth Strategies Group, Eaton Vance

      Boston - The U.S. Congress has recently stripped so many miscellaneous deductions from the tax code that many individuals are grappling for ways to reduce their taxable income. Although the Tax Cuts and Jobs Act of 2017 nearly doubles the standard deduction in 2018 -- to $12,000 for singles and $24,000 for joint filers younger than age 65 -- it caps or eliminates many other valuable deductions.

      One tax-advantaged approach would be to bunch years' worth of charitable deductions into a single year. This strategy can help individuals 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.

      Bundling contributions with donor advised funds

      Bundling a number of years' charitable contributions into a single year allows a taxpayer to exceed the standard deduction in that year and receive a tax benefit. For instance, instead of donating $2,000 a year for five years, the taxpayer in the above example could make five years' worth of contributions ($10,000) in a single year.

      In that case, his itemized deductions would total $32,000 ($12,000 mortgage + $10,000 state tax + $10,000 charitable), exceeding the standard deduction of $24,000 by $8,000 (see the figure below). Assuming a 35% marginal tax rate, this $8,000 additional deduction would produce $2,800 in tax savings. Thus, the taxpayer would incur a net outlay of $7,200 ($10,000-$2,800), instead of the net outlay of $10,000 had he contributed $2,000 per year for five years.

      Blog Image Charitable Giving Oct 4

      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, the taxpayer could consider establishing 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 even can change the charitable entities that receive the DAF disbursements along the way.

      Bottom line: Bundling charitable deductions using a DAF allows investors to lower their taxable income and donate to charity for years to come.