New Tax Law Makes Bundling Gifts to Donor-Advised Funds Attractive
By Greg Singer
Senior Vice President and Head of Client Solutions
Last year at tax time, we were worried that a new tax law might cap or eliminate the charitable deduction. The good news is that it didn’t. But the bad news is that, for many families, it effectively did.
The increase in the standard deduction combined with the elimination of many other itemized deductions means that many more tax returns will take the standard deduction. About 30 percent of tax filers now itemize, according to the Internal Revenue Service. But that number could plummet to about 10 percent next year because of the new tax law, according to the nonpartisan Tax Policy Center.
Taxpayers who use the standard deduction do not receive any marginal tax deduction for their charitable gifts. However, if you bundle multiple years of gifting into a single tax year, then you may be able to itemize again and, thus, restore your charitable tax deduction.
How New Tax Law Reduces or Eliminates Charitable Deductions
Let’s suppose that in 2018, you are a couple with deductions of $10,000 from state and local taxes (the maximum deductible under the new tax law) and $14,000 of charitable gifts. That would add up to a total itemized deduction of $24,000, which is equal to the new standard deduction. Thus the taxpayer is not getting any incremental deduction for their $14,000 of charitable gifts.
How Bundling Restores your Charitable Deduction
Now imagine that instead of directly giving your $14,000 annual gifts to charity each year, you bundle two years of gifts into a single tax year by donating $28,000 to a donor-advised fund (DAF). Now, you have $38,000 of itemized deductions and that additional $14,000 reduces your tax bill, a tax savings of about $5,180 for investors in the 37% tax bracket. You can still request that the DAF gifts $14,000 per year to your charitable beneficiaries as you’ve done in the past.
Furthermore, this strategy is scalable. You could put 5 or 10 years of donations up front into a DAF as each additional dollar is deductible where as if you do this over time, the first $14,000 each year is not. Money gifted sooner accelerates the timing of the tax deduction into the current year and the money in the charitable fund grows tax free providing additional charitable assets.
A Japanese proverb states that a single arrow is easily broken, but not ten in a bundle. Under today’s tax laws, your annual deductions may no longer be tax deductible, but a bundle of 10 year’s deductions could create more wealth for both you and your charitable beneficiaries to enjoy.
Greg Singer is a Senior Vice President and Head of Client Soultions with Capital Group Private Client Services. Based in New York, he joined our firm in 2012 and has more than a decade years of investment industry experience.
Posted on April 27, 2018.