In a previous post, we highlighted the fact that the 2017 tax law may affect the ability of some taxpayers to receive a tax deduction for their charitable donations, because the law (a) eliminated or reduced many deductions previously available, and (b) significantly increased the standard deduction, making it more difficult to exceed the standard amount with itemized deductions.

For individuals age 70 ½ or older with charitable intent, a Qualified Charitable Distribution, or QCD, may be a tax-efficient strategy to consider. You can view our previous post on this topic here.

But what if you’re not yet 70 ½, but are still hoping to get a tax break for your charitable giving? You might want to consider “bunching” your deductions.

What is bunching?
Bunching is the grouping of charitable gifts you intend to make in the future into a single year, so that your charitable contribution is large enough to itemize your deductions in one year, and zero in the years that no gifts are made.

How does it work?
Start by reviewing your anticipated charitable giving for this year, next year, and perhaps the year after next, with the objective of exceeding the standard deduction amount with your combined deductions. Then, “bunch” all your gifts together and make them this year. For this tax year, you would itemize your deductions to reduce your taxable income. For next year, and perhaps the year after next, you wouldn’t make charitable donations and would claim the standard deduction on your tax return.

What is the tax savings?
The tax savings comes from using the standard deduction in the years you don’t make charitable donations.

For example, let’s consider a retired married couple in their early 60s, whose only annual non-charitable deductions are a combined $10,000 of state and property taxes, and who generally make charitable gifts of $10,000 every year. They’re currently in the 24% tax bracket. Their CPA has made them aware of the new tax law and the impact on their deductions. They’re willing to combine three years’ worth of gifts into one, if it will help their tax situation. Under this scenario, this year’s tax would be reduced by a deduction for bunched charitable gifts of $30,000. The tax savings this year would be $3,840 (which is calculated as the $16,000 difference between their $40,000 in deductions and the $24,000 standard deduction, times their 24% tax rate). Next year and the year after, they will claim the standard deduction.

Can you bunch more than two years of charitable donations?
Absolutely, but for some it can be difficult to predict their future charitable gifts. In the event you’re not entirely certain of the amounts or beneficiaries of future donations, a “donor advised fund” may be an effective option.

In a previous post we wrote about donor advised funds and how they can provide flexibility to your charitable giving. You can read that post here.

Before making any decision about charitable giving, you should consult with your estate planning attorney, accountant or CPA, and/or financial advisor for guidance.

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