At the Community Foundation, we strive to build partnerships with our donors and provide the latest in philanthropic news and tax law changes.
There is concern that the large increase in the new Standard Deduction could possibly remove the advantage of deducting charitable contributions. Here’s why: if your total deductions don’t exceed the new larger standard deduction, there is no advantage to itemizing your deductions when you file your taxes.
While you can still make tax-deductible donations to charities, it won’t make a difference on your tax return unless your total deductions now exceed $12,000 for single filers and $24,000 for joint filers. Common deductions include charitable contributions, mortgage interest, real estate taxes, and state and local taxes.
You love giving. You don’t love paying taxes.
HOWEVER, by creating a Donor Advised Fund (DAF) at the Community Foundation, you may able to accomplish both goals.
Establishing a Donor-Advised fund allows you to bundle multiple years of your intended charitable giving into one year, thus exceeding the standard deduction. You can take the deduction for your full gift the year you establish the fund and minimize the the gifts the following year in order to take advantage of the larger standard deduction. Your giving remains consistent through grants distributed from your fund.
Tax Bundling
This technique involves doubling up tax-deductible payments into one year and itemizing your deductions, then minimizing these payments the following year in order to take advantage of the large standard deduction.
Let’s look at an example assuming the following couple who make $100,000 a year have the following deductions:
| Charitable Contributions | $10,000 |
| Mortgage Interest | $ 4,000 |
| Real Estate Taxes | $ 3,000 |
| Local Taxes | $ 3,000 |
| Total Deductible Expenses | $20,000 |
Since the standard deduction for this couple is $24,000, they will get a $24,000 deduction. If we followed this example over 4 years, it would total $96,000 in deductions.
If they “bundle” their giving and contribute $20,000 to a Donor Advised Fund (DAF) every other year. In 2018 and 2020, they are able to itemize $30,000 worth of deductions. In 2019 and 2021, they take the standard deduction of $24,000 instead of itemizing. Their 4-year total deductions are now $108,000. You could also “bundle” your real estate taxes and realize even greater total tax deductions.
Consistent Contributions to Charities
Bundling was already practiced by some, but without a DAF, our couple would have to drop large sums into charities one year followed by a year of no giving. With a DAF, you are able to get a significant tax benefit and distribute funds out of your DAF on a consistent basis.
Teaching the Next Generation
Establishing a DAF is also a great opportunity to make charitable giving a family affair. Start by distributing funds as a result of a family discussion, and gradually teach children how to get involved and support causes they value. Eventually, delegate some of the responsibility of distributing funds to the next generation.
Contact Lisa Geren to learn more about Donor Advised Funds and see if this would be right for you.
