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Maximize charitable giving by bunching deductions
November 20, 2018 at 10:40 AM

Calculator on top of a tax return, focused on the charitable giving portion of the form.The Tax Cuts and Jobs Act of 2017 brought a myriad of changes to the tax law, including for individual taxpayers. While certain deductions that were available to individuals have now been limited — e.g., the $10,000 limit on the state and local income tax (SALT) deduction — the standard deduction has increased to $24,000 for a married couple filing jointly and $12,000 for single filers. In 2017, the standard deduction was $12,700 for a married couple filing jointly and $6,350 for single filers.

As a result of the increased standard deduction, many taxpayers who previously itemized their deductions — that is, elected not to take the flat standard deduction because their deductible expenses exceeded the standard deduction amount — will now find that their deductible expenses are less than the standard deduction.

With the $10,000 limit on the SALT deduction, and with many taxpayers not having a mortgage interest deduction or medical expenses that exceed the minimum amount to be deductible, the charitable deduction could provide a planning opportunity for those with a consistent charitable giving plan.

For example, assume that a married couple annually gives $20,000 to charitable causes, has a SALT deduction each year of $10,000, and has no other deductible expenses. In 2018, they would itemize because their total deductions ($30,000) exceed the standard deduction of $24,000 by $6,000. Assuming that their charitable giving remained the same for four years, their total deductions during the four-year period would be $120,000.

Assume instead that over the same four-year period, the couple “bunches” their deductions by giving $40,000 to charitable causes in years one and three, resulting in total deductions for each of those two years being $50,000 (including the $10,000 SALT deduction each year). In years two and four, because few or no charitable contributions are made, total deductions are $10,000 for the SALT deduction, resulting in the couple taking the $24,000 standard deduction. At the end of the four-year period, the couple will now have used $148,000 of deductions.

As a result of the couple bunching their charitable deductions versus continuing to give the same amount each year, they will likely reduce their overall tax liability for the four-year period.

While this provides a planning opportunity for individual taxpayers, this will likely result in revenue instability for charitable organizations. However, with proper coordination, individuals and the charitable organizations they support can benefit. Furthermore, this strategy could provide the same type of benefit for those planning to contribute to their donor advised fund or private foundation.

If you have questions about using such a charitable giving strategy or would like to talk to someone about other charitable planning opportunities, please contact an attorney in our Trusts & Estates Department.

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