Advanced Tax Planning Ideas - Lumping Charitable Gifts

Advanced Tax Planning Ideas - Lumping Charitable Gifts

February 12, 2021

If you are one of the 90% of taxpayers who don't itemize deductions, you cannot claim a federal deduction for charitable donations. To get past this issue, some people lump their charitable gifts together. Wondering how to claim a deduction for charitable giving? Curious about how clustering charitable gifts together can help? Here's what you need to know. 


Standard Versus Itemized Deduction 


Before the Tax Cuts and Jobs Act (TCJA), the standard deduction was $6,500 for individuals and $13,000 for married couples filing jointly. As of 2020, the standard deduction is $12,400 for individuals and $24,800  for couples. 


When you file your tax return, you can claim the standard deduction or you can itemize deductions. Itemizing simply means that you add up all your qualifying deductions such as mortgage interest, state and local taxes, medical expenses over a certain threshold, and of course, charitable gifts. If your list of itemized deductions exceeds the standard threshold, you itemize.


In the past, itemizing was relatively common, but as indicated above, now, only a small percentage of taxpayers have enough itemizable deductions to exceed the standard threshold. 


Clustering Deductions


To reduce their tax liability as much as possible, some people focus on clustering their deductions. To explain, imagine you're an individual with $10,000 in itemizable deductions every year for three years, but because that amount is under the threshold, you claim the standard deduction each of those years. 


But you can set up your investments strategically so that you incur all of those itemized deductions in the same year. Then, you can claim a $30,000 itemized deduction for one year, while you claim the standard deduction for the other two years. Ultimately, this strategy helps to reduce your total tax liability. 


Lumping Charitable Gifts Together


While people cluster all kinds of itemizable deductions together, they often employ this strategy with charitable giving in particular. Taxpayers approach this practice in a few different ways. 


Say you're an individual who wants to donate $5,000 per year to your favorite charity, but this donation combined with your other itemizable deductions doesn't exceed the standard threshold. As a result, if you donate $5,000 per year, you don't receive any federal tax benefit. 


To get past this issue, you decide to donate $20,000 every four years. Now, you itemize every four years, claiming this large donation plus any other itemizable deductions, and you claim the standard deduction the rest of the time. 


Utilizing Donor-Advised Funds


When giving in this pattern, some people just set aside the money and give every few years as explained above. However, in some cases, people turn to donor-advised funds. Although these funds have been around since the 1930s, they only started to become popular in the 1990s, and since the TCJA became law, they have become increasingly popular. 


Essentially, you make a contribution to the donor-advised fund, and the investments grow. Then, you decide which charities you want to receive grants from your fund. You receive the tax benefits as soon as you put the assets in the fund, but charities don't receive the money until you direct the fund manager to distribute the funds. 


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