With only a few months left in 2022, it's time to think about charitable giving and ways to stretch your dollars.
Using a donor advised fund (DAF) can make it easier to itemize your charitable deductions. A DAF can also be an excellent generosity-maximizing tool. Many of our clients use a giving strategy called, "charitable bunching" to maximize their tax deductions and maximize what they are able to give.
The 2022 standard deduction for married couples filing jointly is $25,900. For single individuals, the 2022 standard deduction is $12,950. Therefore, taxpayers may only benefit from itemizing their tax deductions if their total deductible amount exceeds those figures.
Taxpayers who donate significant amounts to charities each year and still find themselves slightly below the standard deduction threshold may want to consider bunching itemized deductions.
What does it mean to bunch tax deductions?
In summary, the concept of "charitable bunching" means contributing more than one year’s worth of charitable contributions in a single tax year to help minimize your tax burden in the long-run and maximize what you can give to charities.
You are eligible for a tax deduction in the year that you make a donation into a DAF even if the funds are not distributed in the same year.
Scenario 1: Annual charitable giving
The Smith family gives $8,000 to their church every year. In 2022, they also have $15,000 in other deductible expenses, bringing their total deductions to $23,000.
2022: $8,000 (charitable giving) + $15,000 (miscellaneous) = $23,000 deduction
2023: $8,000 (charitable giving) + $15,000 (miscellaneous) = $23,000 deduction
They will take the standard deduction of $25,900 in both years meaning that they have received no tax benefit for their charitable giving.
Scenario 2: Bunching charitable deductions
The Smith family are is able to increase their giving to $16,000 in 2022: They donate the usual $8,000 to their church and donate the remaining $8,000 into a DAF.
They can now itemize their tax deductions this year:
2022: $16,000 (charitable giving) + $15,000 (miscellaneous) = $31,000 deduction
Next year, they can give through their DAF to support their church and will receive the $25,900 standard deduction.
2023: $0 (charitable giving) + $15,000 (miscellaneous) = $15,000 deduction
Bunching tax deductions—charitable gifts or other deductions—is one great way to expand your generosity. It can provide you with more flexibility and opportunity to give.
If you are interested in learning more about how we can serve your charitable giving and other financial planning needs, please contact us at 302.234.5655 or firstname.lastname@example.org to learn more.
Content in this material is for general information only and is not intended to provide specific financial, tax, or legal advice for any individual. And it may not be used for the purpose of avoiding any federal tax penalties. Please consult financial, legal or tax professionals for specific information regarding your individual situation.