Can Charitable Bunching (Clumping) To A Donor Advised Fund (DAF) Lower Your Taxes?
As school starts and 2022 winds down, now is a good time to start thinking about lowering your tax bill, not just now but in the future too.
How can charitable bunching lower your taxes?
Bunching, or clumping, several years’ worth of charitable contributions into one larger contribution can make your itemized deduction larger than the standard deduction, saving you money on taxes. Spreading smaller charitable contributions over several years for many taxpayers means they get little or no tax benefit because they never get much above the standard deduction. This became more common when the IRS dramatically increased the standard deduction in 2018 and put a limit on the amount of deductible state and local taxes (SALT).
A common scenario I might see with clients is they usually give around $3,000-$5,000 each year to charity. Even with another $20,000 in miscellaneous deductions, they are still below the 2022 standard deduction of $25,900. They get the satisfaction of doing good, but not lower taxes.
But what if they bunched five years and donated $25,000 all at once? They now have itemized deductions of $45,000 for one year, almost $20,000 of deductions above the standard deduction. Without bunching, they would have five years of standard deductions of roughly $129,500 (5 x $25,900). With bunching, they would have $45,000 the first year and then $103,600 for four years ($25,900 x 4 years) = a five-year total of $148,600 in deductions. You’re giving the same amount to charity but saving much more on taxes!
But what if I change my mind about a specific charity?
Charitable gifts are irrevocable — no givebacks. If I change my mind, I’m out of luck. My gift is not doing the good I intended. Plus, I like giving every year; it’s part of my yearly habit. This is where a Donor Advised Fund (DAF) comes in. You can make the clumped-up one-year donation to the DAF, a sponsored charitable organization. And then, your “own personal” DAF charity can give to a specific charity, or multiple charities, over the years, or you could skip several years; it’s up to you! Talk about flexibility! You can name your charity what you want; this allows your donations to be anonymous if you wish. As you might guess, you don’t get to deduct the donations FROM the DAF; you only get to deduct donations TO the DAF.
Other DAF FYIs:
- They can hold investments allowing your gifts to grow over time.
- Your yearly contribution limit is usually based on 60% of your Adjusted Gross Income (AGI).
- You can gift appreciated securities avoiding capital gains taxes.
- Bunching and clumping into a DAF can work well in any year, but especially in a high-income year.
Probably the most important takeaway is that making the most of what you have is not just about tax preparation, where you are reacting year-to-year with a deduction here and a donation there, but looking into the future to see how you save the most in taxes over time. Tax planning allows you to take advantage of opportunities over the long term. This is the difference between tax preparation and tax planning. With a fiduciary tax planner like Sona Wealth, you could be in a position to Give Well and Live Well.
For more on opening a DAF with Sona and AEF:https://www.sonawealthadvisors.com/donor-advised-funds/
Charitable Bunching To Lower Your Taxes