.png)
The vast majority of people are getting zero tax benefit from their charitable giving. But in this video, I'm going to show you a simple strategy that ensures your generosity not only makes a difference in the world, but also lowers your tax bill.
And stay tuned until the end, because I'm going to cover a special type of investment account that you can pair with this strategy to supercharge your giving even further.
Before we get into our strategy, we first need to understand how itemized tax deductions work. Itemized deductions can reduce your taxable income for the year, but only if the total of those itemized deductions is more than the standard deduction.
Charitable contributions are an itemized deduction and the other two most common itemized deductions are state and local taxes and mortgage interest.
The standard deduction for a married couple filing jointly in 2023 is $27,700. So if a married couple's itemized deductions don't add up to more than $27,700 in 2023, then they're going to take the standard deduction, which means they get no tax benefit from those itemized deductions, including their charitable giving.
How do we solve this problem? By bunching our charitable contributions together.
Bunching your contributions refers to making multiple years of charitable contributions in one year. By doing this, you're more likely to have itemized deductions that are greater than the standard deduction.
Let's look at an example, which will make this clear.
We'll take a married couple in the 24% federal income tax bracket.
We'll assume they get the full state and local tax deduction, which is capped at $10,000/year. They're going to pay $10,000 in mortgage interest, and they do $6,000/year of charitable giving.
They have no other itemized deductions, which puts their total itemized deductions for 2023 at $26,000. And we're going to assume a similar amount for the next two years as well.
As we just discussed, the standard deduction in 2023 is $27,700, which is more than their total itemized deductions. So they're going to take the standard deduction.
That means they have $18,000 of charitable contributions over the next three years, which they get no tax credit for.
What if they made those three years of charitable contributions in one year? Now the total of their itemized deductions in 2023 is $38,000, which is $10,300 more than the standard deduction.
So they can take an additional $10,300 off their taxable income for the year, and at their 24% tax bracket, that means they're going to pay $2,472 less in federal taxes.
The next two years, they won't be making any charitable contributions, so they'll take the standard deduction, as they would have been doing anyways.
So they contributed the same amount to charity over three years, but they saved $2,472 in taxes just by bunching those three years of contributions into one year.
And they can repeat this every three years and continue to get that tax benefit.
In this example, we bunched three years of contributions together, but it could have been two years. It could have been four years or more.
The point is that you're grouping your contributions together in order to reduce the portion of the overall contributions that fall below the standard of deduction line.
Also, in this example, I assumed that the couple had the money available to make three years of charitable contributions in year one.
That's an optimistic assumption, and I realize that most people don't have that much cash just laying around to give away up front.
So if that's the case for you, you can do the same strategy in year three. Rather than giving money to charity in years one and two, you put the money that you otherwise would be giving into a savings account or a taxable investment account and then you give it all in year three.
So we can see the clear tax benefit of bunching our charitable contributions together. There are a couple of issues that you may be thinking of though.
What if I don't know which charities I want to give three years worth of contributions to right now?
Or I prefer giving monthly rather than one big gift every few years?
Well, that's where a donor advised fund can help.
A donor advised fund is a kind of personal, charitable investment account. And you can open one at most of the same places you can open any investment account.
When you contribute money to this account, you're making an irrevocable gifts to charity.
You can't pull money out of a donor advised fund for any purpose other than giving it to charity, but because it's irrevocable, you're eligible for an immediate tax deduction on your contribution.
You can invest the money within your donor advised fund, and any growth is completely tax-free, which means more money that you can give to support your favorite charities.
Over time, you can direct the money within your donor advised fund to your charities of choice. This process is known as recommending grants, and it can be a one time gift or a recurring donation.
The charity you're supporting needs to be an IRS qualified public charity, which would include most churches, universities, and other 501c3 organizations.
Ultimately, the final decision of whether to approve a recommended grant lies with the sponsoring organization, which is typically whoever you opened the account with. But if it's going to an IRS qualified public charity, the recommended grant will usually be approved.
It's important to note that you don't get another tax deduction when you send money out of your donor advised fund to the charities you're supporting because you already got that tax deduction up front when you put the money in the donor advised fund.
Donor advised funds are great to pair with a bunching strategy because you can give your large multi-year charitable contribution to your donor advised fund which gives you an immediate tax deduction but then you can still decide where to give that money later.
So if you don't know which charities you want to give to yet, no problem. The money will stay in your donor advised fund until you decide plus you can invest those dollars and potentially get some tax-free growth in the meantime.
Also if you still want to give to your charities on a monthly or annual basis, that's also really easy. You can send money out of your donor advised fund on a recurring schedule, either monthly or annually, the same way you could if you were giving out of a bank account.
So overall, bunching your charitable contributions together utilizing a donor advised fund equips you to be a more strategic and tax-savvy philanthropist.
If you want to incorporate a donor advised fund into your charitable giving strategy, schedule a free consultation and we can talk through it!
.svg)
.svg)
.svg)
