January 17, 2018
The Benefits of Bunching Charitable Deductions Using a Donor-Advised Fund
Posted by Jerri Hammer
Under the new tax law, many charitable donors may benefit from using a donor-advised fund (DAF) to bunch their charitable contributions in alternate years. DAFs facilitate the timing of bunched deductions because you get an immediate tax benefit when you contribute to the DAF, but you can choose a recipient and make grants from the funds at a later date.
Anne is married and in the highest income tax bracket for 2018. She and her spouse own their home outright, with no mortgage. Their annual property taxes are $12,000, and they typically give $10,000 each year directly to their church. Under the new tax law, she and her husband would be entitled to a $24,000 standard deduction in lieu of reporting itemized deductions, such as medical expenses, real property taxes and charitable contributions.
If Anne follows her usual practice of paying the property taxes and making the church contribution in December of 2018, her actual itemized deductions would total $20,000. (Her property tax deduction is capped at $10,000 under the new law, but there is no cap on charitable deductions, so $10,000 property taxes allowable plus $10,000 actual charitable donation equals $20,000.) This is lower than the standard deduction of $24,000 allowed to married couples filing jointly, so they would report the $24,000 standard deduction in lieu of itemizing for 2018. If they are in the 37% marginal income tax bracket, the standard deduction reduces their tax by $8,880.
So what if Anne chooses to use a DAF and “bunch” her charitable deductions, making two years’ worth of charitable contributions in one calendar year (the “on” year), and paying none the next year (the “off” year)? In 2018 she socks away not only her 2018 church contribution but also her 2019 contribution into a DAF, for a total of $20,000. Her property tax deduction is limited to $10,000 under the new law, but there is no similar limitation on the charitable contributions. Therefore, her itemized deductions total the $10,000 in property taxes allowed plus the $20,000 donated to the DAF, or $30,000 total. At a 37% tax rate, the $30,000 deduction saves her $11,100 in tax, $2,220 more than the $8,880 tax savings from the standard deduction.
In 2019, she and her husband make no additional charitable contributions personally, but they still benefit from the $24,000 standard deduction that year. Bunching produces a win for them in 2018 with no loss in 2019. They could bunch their charitable contributions again in 2020 (their next “on” year), make no additional contributions in 2021 (their next “off” year), and so on from there.
The Advantages of a DAF
Using the DAF, Anne can choose the year she makes her charitable contribution in order to minimize her tax liability, while retaining flexibility on the timing of the contributions from the DAF to her charities. She can now give away the $20,000 in her DAF at her leisure, either in small or larger, more impactful amounts.
The income earned by the invested DAF funds is not subject to income tax and is available to fund even more charitable donations. Furthermore, this technique becomes even more tax-efficient if she is able to fund her gift to the DAF using long-term appreciated marketable securities, because she’ll be able to avoid paying the income tax on the appreciation on those securities, in addition to enjoying a full fair market value deduction for the gift (perhaps subject to some income limitations―a topic for another day). Talk to your Armanino professional to learn more about whether this charitable giving strategy could benefit you.
After a decade of practicing law, Jerri made the jump to the accounting world in 1997. She brought with her years of experience in the estate planning, trusts and probate areas, which she continues to apply in her work with her individual tax clients.
She focuses on estate and income tax planning and compliance (federal, state, international) for high net worth individuals and families, trust taxation and administration, fiduciary consulting and litigation, and all facets of the not-for-profit entity, including recognition of tax-exempt status, reporting and excise tax issues. Her experience as a lawyer handling divorce cases also allows her to provide clients with specialized tax planning advice and assistance during the litigated, collaborative or mediated divorce process.
Jerri received a J.D. from the University of Texas School of Law, an M.S. in accounting from the University of Texas at Dallas, and a B.A. in English from the University of Texas at Austin. She is a member of the American Institute of Certified Public Accountants, the Texas Society of Certified Public Accountants and the Dallas Estate Planning Council.