Tax-Wise Giving Strategies, Part 1 – Bunching Gifts & Donor-Advised Funds
Most people begin to think about charitable giving strategies at the end of the year. However, I think January is the time to plan for the year ahead because there are many strategies that if implemented would change the way you give throughout the year.
Tax savings is not the reason we give to the charities we value. However, if you are planning to give, let’s not leave Uncle Sam a tip! With that in mind, over the next three weeks, I will outline three strategies to consider this year.
Bunching Gifts is when you make several years’ worth of charitable gifts in one year. By bunching the gifts, you might be able to take yourself over the standard deduction and itemize your deductions, getting a tax benefit for your charitable gifts. You can also maximize tax deductions during years of particularly high income.
Example: Bob and Jane normally give $5,000/year to charity that they itemize on their tax return. Their itemized deductions total $26,000, while their standard deduction is $24,000. This results in only $2,000 of the $5,000 (40%) minimizing their taxes. Instead, they give $15,000 in 2022 and nothing in 2023 or 2024. This makes their itemized deductions $36,000 in 2022, allowing them to deduct $10,000 for the gifts they would have made in 2023 and 2024 but otherwise would not have gotten a full tax deduction on.
Donor-Advised Fund (DAF) - While the strategy above might make more of your gift tax-deductible, many people prefer to give on a regular basis. This is where a DAF can help. With a DAF, you can make tax-deductible contributions into the DAF and then make regular gifts out of the DAF whenever you want. In the example below, Bob and Jane contribute $15,000 into the DAF in 2022, deduct it entirely in 2022, and then make gifts of $5,000 in 2022, 2023, and 2024.
Utilizing the bunching strategy with or without a donor-advised fund is a great way to maximize the tax benefit of your charitable giving!
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.