2018 marks the first tax year under the provisions of the Tax Cuts and Jobs Act. The law ushered in many changes, including an increase in the standard deduction. The deduction for single filers is now $12,000 (up from $6,350 for 2017) and $24,000 if you are a married joint-filer (up from $12,700). In reality, this means that the number of households claiming the itemized deduction (including their charitable donations) will reduce from 37 million to approximate 16 million (according to the Urban-Brookings Tax Policy Center). But, fear not. There are strategies to clear the initial standard deduction threshold.
What the Heck is Bunching?
One of the major options available to charitable donors is to “bunch” donations. To bunch donations you make larger charitable donations this year in a way that exceeds the standard deduction and then smaller ones next year to compensate. Depending on your charitable giving capacity and goals, this means you could alternate every other year or every few years.
Reminder, substantiated donations to a qualified nonprofit can be combined with mortgage interest and state/property taxes when calculating excess above the standard deduction limit. (The Greater Kansas City Community Foundation created a useful illustrated chart of this concept.
Bunching in Practice
By way of example, instead of giving you “normal” $5,000 to charity annually, consider accelerating your gift two years worth of donations in 1 year. So you would end up giving $10,000 every two years. The $10,000 is the same amount you planned to give over the two years but strategically donated in a way that maximizes itemized tax benefits. With this option, you may claim your itemized deductions over the limit one year and then take the standard deduction the next.
If you’re considering bunching donations, you may want to do so through a donor-advised fund (or DAF), which offers a unique level of donative flexibility. The DAF allows you to make charitable contributions and receive an immediate tax break for full donation, even though you can choose to recommend grants to your fave nonprofits from the fund at a later date and over time.