Bunching Tax Deductions to Maximize Their Benefit Part II

An old technique has new value after the Tax Reform bill



All may not be lost when it comes to maximizing the benefit of these expenses, in particular, charitable contributions. Through a technique known as bunching, a taxpayer can keep their total expenses the same, but increase their total tax deductions over multiple years. Under bunching a taxpayer delays a year’s worth of charitable giving from one year to the next, but then gives double the amount to charity in that second year. The total giving stays the same, but the total tax deductions claimed are increased.

A partial solution to that issue is to consider gifting to a donor-advised fund (DAF). A DAF is a charitable entity, equivalent to a private foundation, but without the setup expense or ongoing tax filing responsibilities. Contributions to the fund are tax-deductible in the year of the gift, but the funds remain in the account until the donor decides to make distributions to a recognized charity. Donors can spread their grant-making over many years if they so wish, although the donation to the DAF is a completed gift and the funds can’t ever be reclaimed by the donor.

A DAF can be ideal in cases where a taxpayer front-loads multiple years of charitable giving into one tax year but isn’t interested in immediately transferring the funds to the charitable organizations. While the funds remain in the DAF, they can be invested to grow over time, providing even more funds to transfer to charity in the future. DAFs are becoming a common tool for managing larger charitable gifts, but there are many things to consider before opening an account (such as investment options, expenses related to the fund and rules for making donations). Your Financial Advisor can provide more information on the donor-advised fund options available.

Article provided by Rebecca Ross, Vice President and Financial Advisor at Robert W. Baird & Co., member SIPC. She has 34 years of financial services industry experience and can be reached at 239-541-9090 or rross@rwbaird.com. Baird does not offer tax or legal advice.