Preserving Your Charitable Gifting Deduction
Today’s high standard deductions mean most people don’t itemize their deductions. That means many people who make charitable donations no longer get a tax deduction for those donations. For those who make substantial annual donations, lumping multiple years donations together can help preserve the tax deductibility of (most of) your donations.
Let’s say you are married, your mortgage is paid off, you pay $6000 a year in mortgage interest, and you max out your property tax deduction at $10,000. Your total itemized deduction is $16000. Since you are married, your standard deduction is $24,000, so you wouldn’t even itemize. But let’s say you also make $10,000 each year in charitable deductions. Now your total itemized deductions are $26,000. Although you will now itemize, the actual net benefit of itemizing vs. taking the standard deduction is only $2000 (itemized deductions of $26,000 vs standard deduction of $24,000). Essentially you are only able to deduct $2,000 of your $10,000 donation.
Assuming you make a $10,000 donation every year, there is a very simple way around this problem. It should be apparent from above that if you were to make another $10,000 donation, that entire additional $10,000 would be deductible. Therefore, a useful strategy for charitable donations is to simply lump multiple years donations together and take the deduction all in one year. While you get the same $2000 deduction for this year’s donation, you essentially get a full deduction for next year’s donation when you move it forward to this year.
But what if you don’t want to give your charity the money all at once? Or what if you haven’t decided who to donate to?
In this case you can make use of what’s called a Donor Advised Fund. It is a special account you setup which is setup such that once you deposit money, it can only be used to make a charitable donation. You can’t take it back; you can’t use it for anything else. The IRS considers donation to a Donor Advised Fund to be a deductible donation in the year the money is deposited, but you can leave the money in the fund to distribute at some future date. If you were to have a very high-income year, you could conceivably make your next 5 or 10 years of donations all at once, to offset that high income, then dole it out over future years. Meanwhile, you can choose to invest those funds to grow, or at least earn some interest, while you wait to dole them out.
Donor Advised Funds are set up and managed by brokerage and/or mutual fund companies. Most have minimum account sizes of about $15,000 to $25,000.
If you would like to explore whether “lumping” donations, or a Donor Advised Fund, makes sense for you, send me a note and we can discuss it. If you think you want to make such a donation in 2022, don’t wait too long – particularly for the donor advised fund. There is typically a year end rush to setup these accounts so getting started early is important.