A donor-advised fund for bunching itemized deductions
Generally, bunching itemized deduction means you can group several of your itemized deductions every other year to exceed the standard deduction in those years. For example, if you own a house, you can pay the property tax for two years by paying in January and December of that target year. A new trick is to do the same thing with your charitable giving by using a donor advised fund. For tax year 2021, the standard deduction was $25,100 for married filing jointly or $12,550 for single filers. Taxpayers 65+ get an addition to their standard deduction of $1,350 each so $2,700 for married taxpayers, $1,700 for singles. Therefore, it is harder for taxpayers to have itemized deductions above their standard deductions. Note: The 2022 standard deduction is $25,900 for married filing jointly or $12,950 for single filers. The 2023 standard deduction is $27,000 for married filing jointly or $13,850 for single filers.
An aggressive bunching of itemized deductions could help taxpayers exceed the new standard deductions in some years while taking the large standard deduction in the other years. Many charitable donors may benefit from using a donor-advised fund (DAF) to bunch several years of their charitable contributions into one year. Many brokerage firms have DAFs. This might entail bunching charitable deductions into a targeted year and funding a DAF from which donations can be distributed to their favorite charities at a later date.
Example using standard deduction: Anne and John are a married couple under 65 years old and with annual income of $110,000. They usually make $10,000 of charitable contributions annually and have real estate taxes around $5,000 each year. Additional large medical bills might be deductible in the target year.
Before bunching: 2023 2024 2025
Real Estate Tax $5,000 $5,000 $5,000
Charitable Contribution 10,000 10,000 10,000
$15,000 $15,000 $15,000
They have to use standard deduction $27,000 for each year if not bunching.
After bunching: 2023 2024 2025
Real Estate Tax $10,000 $0 $5,000
Donor-advised fund 30,000 0 0
$40,000 $0 $10,000
They are able to use itemized deductions of $40,000 in 2023 and still use the standard deduction in 2024 and 2025 which is $27,000 in our example. Over the three year period, bunching tax deduction saves them around $2,780. Therefore, when tax year 2022 arrives, they can still bunch 2-year real estate taxes and 3-year charitable contributions to receive itemized deductions of $40,000.
An aggressive bunching of itemized deductions could help taxpayers exceed the new standard deductions in some years while taking the large standard deduction in the other years. Many charitable donors may benefit from using a donor-advised fund (DAF) to bunch several years of their charitable contributions into one year. Many brokerage firms have DAFs. This might entail bunching charitable deductions into a targeted year and funding a DAF from which donations can be distributed to their favorite charities at a later date.
Example using standard deduction: Anne and John are a married couple under 65 years old and with annual income of $110,000. They usually make $10,000 of charitable contributions annually and have real estate taxes around $5,000 each year. Additional large medical bills might be deductible in the target year.
Before bunching: 2023 2024 2025
Real Estate Tax $5,000 $5,000 $5,000
Charitable Contribution 10,000 10,000 10,000
$15,000 $15,000 $15,000
They have to use standard deduction $27,000 for each year if not bunching.
After bunching: 2023 2024 2025
Real Estate Tax $10,000 $0 $5,000
Donor-advised fund 30,000 0 0
$40,000 $0 $10,000
They are able to use itemized deductions of $40,000 in 2023 and still use the standard deduction in 2024 and 2025 which is $27,000 in our example. Over the three year period, bunching tax deduction saves them around $2,780. Therefore, when tax year 2022 arrives, they can still bunch 2-year real estate taxes and 3-year charitable contributions to receive itemized deductions of $40,000.