Tax-Efficient Charitable Giving
by A. Scott White, CFP®, ChFC®, CLU®
President, Scott White Advisors
The Tax Cuts and Jobs Act of 2017 transformed the U.S. tax code, doubling the standard deduction—the limit taxpayers must reach in order to itemize deductions on their tax return. For 2021, the standard deduction is $25,100 for married couples filing jointly and $12,550 for singles. If you are age 65 or older, you may increase your standard deduction by $1,700 if you file single or head of household. If you are married filing jointly and you or your spouse is 65 or older, you may increase your standard deduction by $1,350.
Before the tax laws changed, there was no limit on how much taxpayers could deduct for state and local taxes (SALT). Beginning in tax year 2018, the deduction was capped at $10,000 for all state and local income, property, and sales taxes combined. In addition, investment management fees are no longer deductible. Since the laws changed, many taxpayers don’t have enough itemized deductions to exceed the standard deduction.
To exceed the standard deduction, one tax-efficient strategy is ‘bunching’—where multiple years of deductions are grouped into a single year. As we approach the end of 2021, many taxpayers may be planning year-end charitable gifts. Bunching is a way to increase your charitable giving in this tax year to help you exceed the standard deduction.
You can ‘bunch’ a few years of charitable contributions by utilizing a charitable donor-advised fund. By donating more than one year of charitable contributions to a donor-advised fund, you can deduct the full amount of the donation this year—resulting in a larger charitable deduction for this year. By using a donor-advised fund to bunch multiple years’ worth of donations in a single year, you can receive maximum tax benefits for your charitable contributions.
Gifts to donor-advised funds are tax deductible, so you can combine two, three, or more years of charitable contributions in one calendar year in order to exceed the standard deduction in that year. You can then use the assets in the donor-advised fund to consistently support your favorite charities, even in years when you take the standard deduction. You can instruct the donor-advised fund to distribute donations to your favorite charities until the fund is depleted—or you choose to make another ‘bunching’ deposit to the fund.
When you contribute gifts to a charity through a donor-advised fund, you become eligible to take an immediate tax deduction and then make grant recommendations to qualified charitable organizations in a timeframe that works for you—whether that’s all in one year, or over several years. Also, the funds in your donor-advised fund have the potential to grow tax-free.
Frequently my clients have previously supported or identified charities that they want to support, so I suggest they establish a donor-advised fund at Raymond James Charitable, a pubic charity established in 2000. But when clients are interested in researching charities and getting input on which charities in our area provide services that align with their passion, I recommend they establish a donor-advised fund at Collaboratory, previously known as the Southwest Florida Community Foundation, founded in 1976 to address the evolving community needs in Lee, Collier, Charlotte, Hendry and Glades counties.
Your financial adviser can work with you to determine how bunching can help you support causes you care about—and make tax-efficient philanthropic decisions.
While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Scott White and not necessarily those of Raymond James. Donors are urged to consult their attorneys, accountants, or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.
Raymond James Trust N.A. currently serves as the service provider for Raymond James Charitable, a public charity. Raymond James Trust is affiliated with Raymond James & Associates, Inc., and Raymond James Financial Services, Inc. Raymond James is not affiliated with Southwest Community Foundation.