While only those taxpayers who intend to itemize are eligible to claim deductions for the charitable contributions they make, itemization only makes sense if you would come out better by itemizing than you would by taking one of the standard deductions that were dramatically increased under the Tax Cuts and Job Act. Bunching charitable contributions is one way to come out ahead.
If you’re philanthropically-minded, you likely stand to gain by being strategic in the way you make your charitable donations.
When it comes to bunching, your aim is to accumulate enough charitable deductions in a single tax year that it benefits you to itemize, versus taking the standard deduction.
Say, for example, that you’re in the habit of making a contribution to your favorite nonprofit every year. You might be better served by giving more than you normally would in a given year and skipping a year in-between or making several years’ worth of contributions in one large, lump sum in a single year, instead.
Another way of bunching is to contribute to what’s known as a donor-advised fund or DAF. DAFs offer you the dual benefit of giving you an instant tax deduction while removing the administrative burden from you.
As an example, you can make multiple contributions to a DAF in a single year to, again, help move you past the standard deduction threshold and allow you to take the itemized deduction. Even though you make that contribution and take the itemized deduction in the year you gifted your contribution, by directing the fund administrator to distribute the funds annually in equal increments, your designated charities continue to get contributions on a regular schedule and will not be impacted by whether or not you’re taking the standard or itemized deduction in the years subsequent to the time your gift was originally made.
You can also donate appreciated assets either to a DAF or to the charity of your choice, directly, to help secure a deduction for the assets’ fair market value or, in most cases, to avoid long-term capital gains taxes
Bunching charitable contributions can be tricky so you’ll want to be sure to consult with your Untracht Early tax advisor on the best approach for making your annual donations.