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. Starting in 2018 the standard deductions will be increasing to $24,000 for married filing jointly or $12,000 for single filers. Taxpayers 65+ get an addition to their standard deduction of $1,250 each so $2,500 for married taxpayers, $1,550 for singles. Therefore, it is harder for taxpayers to have itemized deductions above their standard deductions.
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: Anne and John are a married couple under 65 years old and with annual income $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: 2018 2019 2020
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 $24,000 for each year if not bunching.
After bunching: 2018 2019 2020
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 2018 and still use standard deduction which is $24,000 in 2019 and 2020. Over the three year period, bunching tax deduction saves them around $2,780. Therefore, when year 2021 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: Anne and John are a married couple under 65 years old and with annual income $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: 2018 2019 2020
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 $24,000 for each year if not bunching.
After bunching: 2018 2019 2020
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 2018 and still use standard deduction which is $24,000 in 2019 and 2020. Over the three year period, bunching tax deduction saves them around $2,780. Therefore, when year 2021 arrives, they can still bunch 2-year real estate taxes and 3-year charitable contributions to receive itemized deductions of $40,000.