As a result of the 2017 Tax Act, the standard deduction is now $24,000 for tax payers filing jointly, $18,000 for head of household and $12,000 for single filers. Also, the State and Local Tax Deduction, as well as the Local Personal Property Tax Deduction are limited to a total of $10,000 per taxable year. These changes present some income tax planning opportunities for charitable contributions.
The biggest item that needs to be considered is if it would save income taxes for an individual or married taxpayer by paying for three years worth of charitable contributions in one tax year. If the non-charitable deductions for a married couple are less than $24,000, then it may be better to make three years’ worth of charitable contributions in one tax year.
For example, if the married couple annually contributes $10,000 to their church and $5,000 to other various charities, then the married couple should consider bunching all of those contributions by paying three years worth of those contributions in 2018. Thus, they would be making charitable contributions in 2018 of $45,000 and they would not be making any charitable contributions to these organizations in 2019 and 2020. In 2019 and 2020, the couple would simply utilize the $24,000 standard deduction. However, they would resume with the three-year bunching in 2021. From an income tax savings perspective, it is better if that married couple bunches their charitable deductions for 2 or three years into one year.
The next question then becomes how to make these bunching charitable contributions and how to inform those charities. Specifically, you should be upfront with charities. You should let them know that you are making contributions for the next three (3) years in 2018 and that you will not be making contributions in 2019 or 2020. This will help the charity with their planning matters.
If you do not want to make the entire three (3) years of charitable contributions in one year directly to the specific charities, then you could establish a Donor Advised Fund. A Donor Advised Fund is a charitable planning vehicle whereby a couple would establish this Donor Advised Fund with their financial advisor. They would then contribute the $45,000 to this Donor Advised Fund in 2018 and thus, receive a charitable deduction in 2018. Then, in 2018 they would distribute one-third (1/3) of the funds in the Donor Advised Fund to the various charities they desire. In 2019 and 2020, they would make additional contributions from the Donor Advised Fund. This Donor Advised Fund is a great way to accomplish your bunching objectives to potentially save some income tax without actually having to distribute the funds to the charities in one year. You can wait to make the charitable contributions in the year you actually want to make them. As long as the contributions are being made to qualified charitable organizations, then it is a valid contribution and tax-deductible.
If you have any questions regarding this charitable contribution bunching technique or any other matters pertaining to your tax planning, please consult your CPA or tax advisor.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.