How ‘bunching’ helps maximize benefit of charitable donations

By Bari Faye Siegel

Scott Testa, head of Friedman LLP’s Trust and Estates Group in its East Hanover office.

Thanks to the Tax Cuts and Jobs Act, the standard tax deduction will become $12,000 per person in 2018 — almost twice what it was in 2017 ($6,350). And, a married couple’s standard deduction increases to $24,000. That’s great news.

However, with the good comes the bad. The Act does eliminate the vast majority of itemized deductions on personal income tax returns. This is quite important for people who have traditionally chosen to itemize tax deductions in an effort to reduce tax liability.

The increased standard deduction, coupled with the $10,000 limit on the state and local tax deduction, makes it more likely that most people will opt for the standard deduction.

In fact, according to the Tax Policy Center, 46.5 million people itemized deductions in 2017. That number is expected to plummet to about 19.3 million in 2018.

Further, without the ability to deduct charitable gifts in the traditional way, it is expected that many people will forego making donations at all.

Bob Charron, partner-in-charge of Friedman LLP’s Tax Department.

“It’s completely understandable that someone may decide not to make a gift knowing there is no tax benefit under the new guidelines,” explained Scott Testa, head of Friedman LLP’s Trust and Estates Group in its East Hanover office.

Tax experts at Friedman LLP say that the best way for taxpayers taking advantage of the standard deduction to handle these new changes in tax law while also getting the most benefit from charitable donations is to do what’s known as “bunching.”

Bunching is the term used to describe the act of making one large charitable gift to an organization in a single tax year, instead of smaller donations over a period of years.

As an example, let’s say you have always donated $5,000 to the American Cancer Society each year for the past 10 years. For tax year 2018, Bob Charron, partner-in-charge of Friedman LLP’s Tax Department, suggests you “bunch” your donations to the ACS, perhaps making a single donation of $25,000 this year and not making any gifts in the next four years.

Essentially, bunching requires the donor to think ahead and make decisions about charitable gifts in advance. This way, Testa said, all favorite beneficiaries receive donations in a way that benefits the donor as well as the recipient.

“One problem with bunching is what if down the road you find other charities are more appealing and you have already used up your giving budget,” Charron suggested. “A second issue could be what if tax rates rise in the future and, thus, donating in a later year would yield a higher tax benefit.”

Some people may be upset by the concept of bunching because they want to be able to make decisions about which charities to support as time goes on. One tool that can help is a donor-advised Fund.

“This is a charitable investment account for the sole purpose of supporting charitable organizations you care about, that you can name later, but the funds contribute are eligible for an immediate tax deduction,” Charron said.