Did you finish your 2018 tax return and feel like you missed out on the tax break for charitable contributions? If so, you’re not alone. Thanks to tax law changes, many taxpayers who used to itemize their deductions took the new, higher standard deduction this year—eliminating the benefit of their 2018 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 this year.

The 2017 Tax Cuts and Jobs Act doubled the standard deduction from roughly $12,000 to $24,000 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 who typically make at least $5,000 worth 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-deducible 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 that 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 standard deduction of $24,000 that results in tax savings of $8,400.

  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
$8,400 $8,400 $8,400 $25,200

Instead, the couple could bunch three years donations in a single year, boosting their charitable giving to $15,000 and pushing their total tax deductions to $33,000—well over the standard deduction of $24,000. 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 $8,400 $8,400 $28,350

Taking the standard deduction over the next two years, their total tax savings would be $28,350 thanks to the bunching strategy, versus total savings of $25,200 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.

Get On The List

Sign up for my email list and I’ll drop current, cutting edge insights on how to manage your money in unpredictable times.

You have Successfully Subscribed!

Subscribe To My Email List

Subscribe To My Email List

Sign up for my email list and I’ll teach you everything I know about making smart money decisions.

You have Successfully Subscribed!

Download the Goal Planning Worksheet

Please enter your email and we will send it right over!

Please check your inbox shortly!

Download the Net Worth Worksheet

Please enter your email and we will send it right over!

Please check your inbox shortly!

Download the Cash Flow Worksheet

Please enter your email and we will send it right over!

Please check your inbox shortly!

Download the How to Interview a Financial Advisor Worksheet

Please enter your email and we will send it right over!

Please check your inbox shortly!

Download the Rent vs. Buy Worksheet

Please enter your email and we will send it right over!

Please check your inbox shortly!

Share This