Bunching Charitable Deductions Under the New Tax Law

By: Dave Perkins J.D., CPA, CFP®

Tax rates have moved up and down over the years, but we have been following essentially the same system since the Reagan Tax Act of 1986. Starting in 2018, many things will change. These changes will make it likely that fewer people can get a tax benefit from making charitable contributions.

We have two choices when it comes to figuring our deductions. We can itemize, or we can take the “Standard Deduction”. For 2018, the amount of the standard deducted was doubled – to $12,000 for single individuals and $24,000 for married couples. If the total of your itemized deductions exceeds these amounts, you can deduct the higher amount.

John & Mary Taxpayer had $5,000 of state income taxes in 2017, $4,500 of real estate taxes, $11,000 of charitable deductions, and $2,000 of miscellaneous deductions above the 2% threshold, for a total of $22,500. Since that exceeded the $12,700 standard deduction in 2017, they deducted the $22,500 itemized deductions. Now turn to 2018 with the same facts. Miscellaneous expenses can no longer be deducted at all, so their total drops to $20,500. Since that is less $24,000, John & Mary would claim the standard deduction in 2018 and would not itemize.

They would get no tax benefit from their $11,000 of charitable contributions. What could they do to keep that deduction? One strategy is to so-called “bunch” their contributions. Let’s assume they go through 2018 in normal fashion and give away $11,000. In December 2018 they could make another $11,000 of the same contributions they would normally make in 2019, and then skip making any contributions during the 2019 calendar year. Since their total deductions would be $31,500 for 2018, they could itemize rather than claim the standard deduction, and thus get some tax benefit from at least part of their charitable contributions.

A convenient tool for bunching deductions is known as a Donor Advised Fund. This is an investment account into which, for example, John & Mary could contribute the “extra” contributions in December 2018. The account allows them to claim the tax deduction in 2018, while holding the cash until 2019 or later, at which time John and Mary would send it to the charities at the usual time and amounts. Many community foundations can help you set up a Donor Advised Fund, and they are also available through financial companies such as Fidelity and Vanguard. At CIC, we have studied a number of the most popular national Donor Advised Funds and those offered by the Community Foundations in our area. We compared investment offerings, ease of use, and fees – which can vary widely depending on the size of your account. Please contact us if we can help guide you toward one that best fits your circumstances.

The new tax law has many implications for taxpayer behavior, and this particular issue may also be a concern for non-profit organizations.

Dave Perkins is a Consultant & Financial Planner with Carolinas Investment Consulting.  He has 30 years of practical, detailed financial experience in the objective advice business, having worked variously as an attorney, CPA, Certified Financial Planner™, and Fee-Based Investment Consultant. Click here to learn more about how Dave can help you.   David A. Perkins, CPA is a licensed North Carolina CPA firm. Although Dave provides his financial planning and investment consulting services through Carolinas Investment Consulting, it is a separate business from his CPA practice and bears no legal responsibility for tax advice provided by Dave in his capacity as a CPA.

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