Following the 2017 Tax Cuts and Jobs Act, many taxpayers are enjoying a lower federal tax bill for 2018, but may face a reduced tax benefit from their charitable giving. This is due to several factors including lower marginal tax rates and an increased standard deduction of $24,000 for a married couple filing jointly. For taxpayers who have total deductions of under this amount for a typical year, this eliminates the tax benefit they have traditionally received for their charitable giving.
There is a creative strategy called “bunching” that will allow many taxpayers to work around this limitation. Bunching involves combining several years’ worth of planned giving into a single tax year to maximize the deductibility of those charitable gifts.
For example, if a married couple normally donates about $10,000 per year to their church and other charities, but has few other deductible expenses, they would take the standard deduction of $24,000 and get no tax benefit from their giving. However, if that same couple would “bunch” five (or more) years of charitable giving into a single tax year and give $50,000 to a qualified charity such as the Community Foundation, in that year their charitable deduction would exceed the standard deduction, so their gift would result in a substantial tax benefit. If the couple put that $50,000 in a charitable vehicle called a Donor Advised Fund, or DAF, they can get their full tax deduction in the year of the gift and then use that DAF as a “charitable giving account” for making gifts (or “grants” as they are called) to their church and other qualified charities, much as they would by giving directly from their personal accounts. The “donor advisor” [usually the original donor(s)] may recommend or direct how and when the money in the charitable fund is distributed. The money in the DAF is invested and may grow tax-free to increase the amount available to grant to charities. So this charitable giving account could be used to make the couple’s planned $10,000/year of gifts over the five years, and the couple could take the standard deduction for years 2-5 to optimize their overall tax benefit from their charitable giving. Moreover, if the DAF is created by donating appreciated assets, such as stock with a low-basis, then the tax savings are even greater because you can avoid capital gains taxes on the appreciated value of the gift.
The Community Foundation has partnered with local investment advisors in offering Donor Advised Funds and other charitable planning tools to make it simple, convenient, and tax-efficient for community-minded clients to give back to our community. You can let your trusted financial advisor be the investment manager of your charitable giving account so you have a single point of contact for both your personal and charitable funds. Of course, the Community Foundation is always available to answer questions about local nonprofits you may be interested in supporting, or to help you identify high-impact programs that are working to make a real difference in our community. Many DAF fund holders like to co-invest in strategic philanthropic programs along with local foundations, corporations, and like-minded DAF holders to help improve the quality of life in our community.
