(This analysis does not include planning for the use of state tax credits for gifts to qualified charities.)
In a previous post, we suggested that direct gifts of your required minimum distributions (RMD) from your IRA trustee or custodian to your church or other charities is a tax-efficient method of giving (as opposed to you taking your RMD and then subsequently writing a check to the charity). There is yet another strategy we suggest you consider for more tax-efficient giving. To review, under the new tax law passed in December, 2017 (and effective beginning January 1, 2018), the standard deduction has been increased to $24,000 for a married couple, $18,000 for a head of household, and $12,000 for an individual. The law also places limits on certain itemized deductions, such as mortgage interest and state tax deductions. Therefore, most people who previously itemized will now be taking the new, higher standard deduction. While this means such taxpayers will no longer be burdened by actively tracking itemized deductible expenses, they will also no longer directly benefit, from a tax perspective, from making charitable gifts.
If you are charitably-minded, the result of this new law is not tax-efficient for you. Assume (even after accounting for an annual $5,000 gift to your church, as an example) your itemized deductions are less than the standard deduction. Because you will be incentivized to take the larger standard deduction, you receive no charitable deduction related to your church gift. From an income tax perspective, you have just thrown away the $5,000 charitable deduction and, therefore, reduced your tax-home income by $1,500 annually (assumes a 30% marginal tax bracket).
Instead, if you have the means to do so, “bunching” your next five years of charitable giving into one tax year is extremely wise from a tax point of view. Your itemized deductions will now exceed the standard deduction in the year of the bunched gifting. In that “Year 1”, you would choose to itemize and get the full benefit of your lump sum, charitable deduction. In Years 2- through 5, you would choose to take the standard deduction. Put another way, (1) your church receives $25,000 up front (which they’d assuredly prefer), (2) you get the full $25,000 charitable deduction in Year 1 saving you $7,500 in income taxes for the year (assumes a 30% marginal tax bracket), and (3) you still enjoy the newly-increased standard deduction in Years 2 through 5.
This “bunching” of your charitable giving may be accomplished in several ways:
-You may simply issue a check directly to your church or other charities for several years of giving in one year.
-You may choose to set up a donor advised fund. This allows you to write a check in a single year, thereby receiving the full charitable deduction, and then to distribute to your church or other charities over time.
-For rather large gifting, it may even make sense to consider establishing charitable remainder or charitable lead trusts to accomplish “bunching” while also meeting other income needs you or your beneficiaries may have and enjoying related tax savings benefits.
Make an appointment should you want to discuss any of these means of “bunching”.
Please consider “bunching” as an optimal giving strategy, both this year and in the years to come under the new tax law. Happy giving.
NOTE: There are certain limitations on charitable giving such as 30% of adjusted gross income for capital assets and 60% of adjusted gross income for cash donations. Always check with your tax advisor.