This article is part of the Professional Advisor Insights series.
Do you itemize deductions on your personal tax return?
The new tax law means fewer taxpayers will be itemizing beginning in 2018. Bunching your charitable donations could maximize future tax deductions and reduce the tax you pay.
The new tax law almost doubled the standard deduction for most taxpayers in 2018.
If you file a joint tax return, the standard deduction for 2018 jumped from $12,700 in 2017 to $24,000 in 2018. Combined with the new limit of $10,000 on state tax deductions, many taxpayers who itemized deductions in previous years will now benefit more by claiming the standard deduction.
With a little advanced planning, you may be able to increase your tax deductions by timing when you make charitable contributions.
What is “Bunching”?
Bunching charitable deductions is a tax strategy where you alternate between taking the standard deduction one year and itemizing the next.
The strategy is best illustrated with a simplified example (note: the example does not factor in inflation so consult with your financial advisor when planning for your specific needs).
Let’s say a taxpayer has itemized deductions excluding charitable contributions of $16,000, and each year they donate approximately $7,000 to charity. In 2018, their total itemized deductions would be $23,000, $1,000 less than the standard deduction of $24,000. This means the $7,000 charitable contribution generates no tax benefit since the standard deduction exceeds their itemized deductions. In 2019, they make another December donation of $7,000, but are again short of the itemization threshold and claim the standard deduction.
For 2018 and 2019, they made $14,000 of donations and received $48,000 of tax deductions.
The bunching tax strategy encourages the taxpayer to wait and make the December 2018 $7,000 donation in January of 2019. Then, they resume their normal donation routine and make the 2019 donation of $7,000 in December.
In 2018 they would have no donations and would claim the standard deduction of $24,000.
By delaying the 2018 donation until the beginning of 2019, they now have $14,000 of charitable donations to add to their other itemized deductions of $16,000. Total 2019 itemized deductions are then $30,000.
Since that exceeds the standard deduction of $24,000, they would itemize.
Using the bunching strategy and delaying one donation by a few days, the taxpayer still donated $14,000 but ended up with tax deductions totaling $54,000. That is $6,000 more over a two-year period.
What If My Favorite Charity Needs the Funds Every Year?
Many charities depend on loyal donors to make a certain amount of donations every year. One way to meet both of your goals would be to make your charitable contributions through a donor-advised fund at The San Diego Foundation.
You receive a tax deduction when you transfer the cash or property to the donor-advised fund. The San Diego Foundation then pays the charity a certain amount each year.
The new larger standard deduction means some donors are less likely to receive a tax benefit for their charitable contributions unless they apply charitable bunching strategies.
Please consult with your tax advisor and a charitable planning expert at The San Diego Foundation to help ensure your charitable donations continue to work for you and your favorite charity.
About Diane L. Gilabert, CPA
Diane L. Gilabert, CPA is a Tax Manager with Gatto, Pope, & Walwick CPAs. She assists private companies and their owners with tax planning and tax compliance. Other than a recent two-year stint as the CFO at the San Diego Humane Society, Diane has spent her 30-year career in public accounting with both national and local firms.