Broker Check

Tax Bunching to Help Your Fellow Man

December 12, 2018

As the holidays quickly approach, and you head out to the mall for a fit of shopping, I’d guess that you’ll hear a bell ringing upon your departure that hopefully reminds you to think a bit charitably before the year’s end.  For my family and our business, we wrap up the year with an assessment of our charitable gifts and whether they have helped in the community as we hoped. I am grateful to serve on the boards of the United Way of Metropolitan Dallas and Children’s Medical Center Dallas, where we have had extensive discussion about how the 2017 changes in the tax law may affect the number of donors that will contribute to charities nationwide.

We’ve previously discussed the changes to the tax laws for 2018, and added a brief discussion of “bunching” donations to maximize your deductions.  As a refresher, the government increased the standard deduction for 2018 (up to $12,000 for a single filer/$24,000 for jointly filing couples), which greatly reduces the number of people that will itemize their deductions.  The Tax Policy Center estimates that the number of taxpayers that itemize their deductions will fall from 46.5 million in 2017 to 19.3 million in 2018.  The unintended consequence of this is that people may be dis-incentivized to make donations to charity if they get no tax benefit. Enter the idea of bunching.

In the simplest example, Sam and Robin (married, filing jointly) gift $15,000 each year to various charities.  Thus, each year they would need an additional $9,000 in deductions in order to exceed the standard deduction of $24,000 that would make them choose to itemize the deductions.  In this situation, they receive no tax benefit for their philanthropy. However, were they to bunch their donations together, and make a donation of $30,000 in a single year (which they have been accumulating all year in their savings), they easily exceed the standard deduction and save on their taxes by itemizing.  Then, in the subsequent year, they can still take the standard deduction of $24,000.

Donor-advised funds (DAFs) provide charitable taxpayers another opportunity to bunch their deductions.  A DAF is a charitable entity that is funded with cash, but does not require that the funds are given to a charity that year.  If a taxpayer normally donates $5,000 per year and would lose the deduction for that donation under the current tax rules, she can instead fund her DAF.  If she has the funds available, she can donate $25,000, take a deduction for any amount that falls over her standard deduction, and dole the money out over the next five years.  Further details about this strategy can be found here.

There are other creative ways to use the bunching strategy, and your CPA or tax advisor can provide you with ideas that will work based on your income and other deductions.  As financial advisors, we realize that our value is not rooted solely in investment returns but instead in seeing the full picture of how our clients can use their money to have the lives they want.  With the holidays peeking at us around the corner, we wish you happiness and joy, and a prosperous new year.

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. This material is intended for informational purposes only and should not be construed or acted upon as individualized tax, legal or investment advice. Federal tax laws are complex and subject to change. Neither FSC Securities Corporation, nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.