Have you ever finished your tax returns and wondered if you could have done more to maximize your tax breaks for your charitable contributions?
If so, you’re not alone.
Thanks to tax law changes, many taxpayers who used to itemize their deductions can take the new, higher standard deduction this year—eliminating the tax benefit of their charitable giving.
Fortunately, with a little planning and a special vehicle called a donor-advised fund, you can maintain your charitable giving and still enjoy a tax break.
Before I explain the strategy, let’s break down why your charitable donations may not have been rewarded by the IRS in recent years.
The 2017 Tax Cuts and Jobs Act roughly doubled the standard deduction, which is $25,900 in 2022 and $27,700 in 2023 for a married couple filing jointly. The new law also capped state and local tax deductions at $10,000. Taken together, these changes mean many taxpayers who previously itemized their deductions (including charitable donations) are now simply taking the standard deduction.
There’s an alternative approach, though: For individuals making several thousand dollars of charitable gifts each year, donor-advised funds offer a way to continue receiving a tax break for supporting your favorite causes.
A donor-advised fund is a special account that lets you make tax-deductible contributions that are then used to support charities of your choosing.
The money you place in a donor-advised fund can grow tax-free in a range of investments, much like the money you invest in an IRA, and you can decide when and where to make gifts to registered non-profit organizations. But the most important feature is…
You get to claim a deduction in the year you place assets into the fund, which creates a big opportunity for tax savings.
Bunching Donations to Harvest a Tax Break
The best way to maximize the tax-efficiency of a donor-advised fund is bunching several years’ worth of charitable gifts into one contribution.
For example, if you contribute three years’ worth of donations to your donor-advised fund, you can take advantage of the itemized deduction that year. Then, over the next two years, you can take the standard deduction and dispense the money from your donor-advised fund to charities at the rate you typically would.
Here’s how the plan might work for a married couple in the 35% tax bracket who file jointly. Let’s say they normally donate $5,000 to charity every year, and they claim a $18,000 in other tax deductions such as state/local taxes and mortgage interest. In any single year, their $23,000 in itemized deductions would fall below the 2022 standard deduction of $25,900 that results in tax savings of $9,065.
| Year 1 | Year 2 | Year 3 | Tax Savings | |
| Charity | $5,000 | $5,000 | $5,000 | |
| Taxes | $10,000 | $10,000 | $10,000 | |
| Mortgage Interest | $8,000 | $8,000 | $8,000 | |
| Total Deductions | $23,000 | $23,000 | $23,000 | |
| Tax Savings at 35% Bracket | $9,065 | $9,065 | $9,065 | $27,195 |
Instead, the couple could bunch three years of donations into a single year, boosting their charitable giving to $15,000 and pushing their total tax deductions to $33,000—well over the 2022 standard deduction of $25,900. By itemizing deductions that year, they’d receive $11,550 in tax savings in Year 1.
| Year 1 | Year 2 | Year 3 | Tax Savings | |
| Charity | $15,000 | |||
| Taxes | $10,000 | $10,000 | $10,000 | |
| Mortgage Interest | $8,000 | $8,000 | $8,000 | |
| Total Deductions | $33,000 | $23,000 | $23,000 | |
| Tax Savings at 35% Bracket | $11,550 | $9,065 | $9,065 | $29,680 |
Taking the standard deduction over the next two years, their total tax savings would be $29,680 thanks to the bunching strategy, versus total savings of $27,195 if they had claimed the standard deduction each year. The additional tax savings is a result of the couple earning a tax benefit for their charitable giving.
More Benefits—and Important Considerations
Donor-advised funds offer other powerful tax benefits, such as the ability to donate appreciated investments as well as cash. When you donate an appreciated security you’ve held for at least one year, you claim a deduction equal to its fair market value—not your purchase price. So not only do you get an income tax deduction, you avoid capital gains taxes.
Establishing and maintaining a donor-advised fund is relatively simple, too—although they typically require minimum investments and carry annual maintenance fees. But as I explained above, they make most sense for people who typically make large annual contributions to charities and can afford to bunch several years’ worth of giving at once. Those contributions are also irrevocable—you can’t take your money back even if you don’t distribute all the funds after a few years—so planning ahead is essential.
For many people, though, establishing a donor-advised fund can preserve the goals of a charitable giving strategy: Doing good for others, while doing something good for your tax bill, too.
If you want help maximizing the tax benefit of your charitable gifts, click here and learn more about working with me.
