Gift Bunching, DAF, and 2020
By Tom McLean and Will Forester. 12/07/2020
There is barely one month left in 2020 and while many will be happy to put this year in the history books, there is still time left to take advantage of once in a decade charitable gifting opportunities and make an enormous impact on your community and the world.
As I mentioned in the October newsletter, the ability to deduct a higher percentage of your income is a unique feature in 2020. When making cash gifts, it is possible to deduct up to 100% of your adjusted gross income (normally, you can only deduct up to 60% of your income). By itself, that is something worth investigating. However, if you can make your income low with such a robust deduction, it makes for an unusually good opportunity to consider converting part of your tax-deferred traditional IRA to a tax-free Roth IRA.
One conundrum many people face is that with the tax code changes enacted as part of the Tax Cuts and Jobs Act (2017) many individuals and families are no longer able to itemize their deductions. Before the new law was passed, about 3 to 4 times the number of taxpayers itemized deductions. As a result, today many taxpayers get no deduction for making charitable gifts. The CARES Act (passed to address many problems associated with the coronavirus pandemic) offers some relief. A new provision of the tax code, for 2020 only, allows taxpayers to deduct up to $300 from their income – above the line! This means up to $300 of cash gifts is excluded from income and never has to be factored into the itemization process. Note that the provision is $300 per taxpaying unit. This means that those filing as “single” or those filing “married filing joint” both have the same $300 in gifting available to reduce income.
Another technique called gift bunching can help you itemize years of deductions in a single year. This is especially welcome news for those that can no longer itemize deductions. Before you call shenanigans, hear me out! Consider a couple that makes four, $1,000 gifts each year. Their $4,000 in annual gifting is not enough to get them over the $24,400 standard deduction threshold. However, if they combine 10 years of gifting and compress these donations into one year, they have made $40,000 in gifts. This allows a substantial portion of charitable gifts to be deductible where previously $0 was deductible.
I know you are probably saying you do not want to give your favorite organizations 10 years of gifts at once. Well, I have a solution for that too! It is called a Donor Advised Fund (DAF). A Donor Advised Fund is a special investment account for charitable giving and offered by many investment firms like Fidelity and Charles Schwab. In the year you make a contribution to the DAF, you get a deduction for the full amount (up to 60% of you adjusted gross income for cash gifts and 30% for appreciated assets, like stocks). The DAF also allows you to pace gifting just as you normally would. Each year you direct the fund to distribute the desired amount to the organizations of your choice.
Disclaimer: The information provided is not intended to provide personal financial, tax, or legal advice. This article is for informational purposes only. You should consult your tax or financial advisor to understand the impact on your specific situation and the best strategy to implement.
Tom McLean is a guest-contributor to Friendly Water for the World, CERTIFIED FINANCIAL PLANNER™ professional and founder of Advitica Financial Planning. He can be reached at email@example.com.