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Bunch Your Charitable Gifts

If you make charitable contributions, you may have lost the tax benefit since the increase in the standard deduction back in 2018. Here’s how you can get those deductions back.

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Full Transcript below:

Speaker 1 (00:07):

Welcome back to 30 Minute Money. We're giving you action-oriented smart money ideas and bite-size pieces. It's the best podcast in the world. Steve Wershing from Focused Wealth Advisors here to discuss all of the fine details that we put in Bite-size pieces for you.

Speaker 2 (00:25):

Nice to see you, Scott.

Speaker 1 (00:26):

Nice to see you.

Speaker 2 (00:26):

Always happy to discuss things with you.

Speaker 1 (00:28):

Pod lunch

Speaker 2 (00:31):

If you say, so how appetizing,

Speaker 1 (00:33):

So we've talked about this before, but you're going to go a little bit in depth on this bunching for charitable

Speaker 2 (00:40):

Gifts. Yeah, we have talked about it before, but I thought it warranted a little deeper dive, so I wanted to talk about that. So what we're going to talk about is a way for you to get credit for your charitable contributions where the standard deduction has wiped a lot of those benefits out. So just to go back in history a little bit, there used to be all kinds of, well, there still are, but there are all kinds of things that you could potentially deduct from your income before you calculate the tax. They may be certain kinds of taxes, they may be interest payments, they may be medical expenses and charitable contributions. And those things used to be able to list all of those things and then take a deduction for them. But over the last few years, and especially back in 2017, they raised the standard deduction to a point where most people don't have that much in terms of deductions anymore.


So if you're a single taxpayer, that level now is $13,850. If you're a married couple filing jointly, it's $27,700. And so if you're not doing enough deductible things to overcome that, then that's what you take and that's fine. But the problem with it is that if charity is part of your normal routine and you're making those charitable contributions but you don't itemize, then you essentially lose the tax benefit of making that. And of course, that's not why we make charitable contributions, but my feeling is if you make those contributions, well you deserve to get a little bit off your taxes for it. So what we're going to talk about is a strategy or two that you can use to get the full tax benefit on those charitable contributions, even if you don't do enough in one year to overcome that standard deduction. And the key to the strategy is this bunch year deductions.


So make a multi-year contribution in one year and then skip a couple of years. So for example, let's say that you give $5,000 across all the various charities in a particular year. Well, 5,000 is plus whatever other deductible things is not enough necessarily to overcome that standard deduction, but if you give three or four years worth all at once, then you're talking 15 or $20,000. Now it's a lot easier to get above that standard deduction amount and now you get to itemize. And so you can do it a couple of ways. One way is if you're giving to specific charities and you give to them on a regular annual basis, I would call them up. And I recommend to everybody that you give them a heads up on this because otherwise you're going to get 'em very excited and then let 'em down and let 'em know, Hey, this is what I'm going to do.


I contribute about this much every year, but here's what for tax reasons, I'm going to give you two or three years worth of contributions this year. Now don't get all excited about that. I mean, it's great that I'm going to be able to give you the money and you're going to be able to use it a little sooner, but you're not going to see it next year and you're not going to see it the year after that because every two or three years I'm going to do this. So just so you know, I'm not suddenly a much larger supporter and I'm not a supporter next year because I don't give, I'm just doing it for tax purposes. I'm putting 'em all together into one year so that I can more effectively write them off. That's basically the strategy.

Speaker 1 (04:04):

Do people typically do that for multiple organizations or do they just pick one

Speaker 2 (04:10):

And Well, that's another way that you could do it. I mean, you could roll 'em all up into one contribution, but still, if your annual amount altogether doesn't get high enough to utilize, get higher than that standard deduction, then it doesn't really matter whether it's one or several.


But the key to it is accumulating several years worth of it and then giving it all at once. Now you bring up an interesting point and that is that if you regularly give to five charities and you put all five of those together and give that to one in a year and then give it to a different one in a different year, it's not necessarily going to increase the tax treatment of it, but you may be able to have more of a say in that organization if it's a big enough donation. So I mean, there may be other non-tax reasons for doing that, but for tax purposes, really what we're doing is talking about accumulating several years worth of donations at once and doing that, doing them all together. Now, one thing I would also encourage people to remember is that you may think of philanthropy and your participation in your church if you are one of those denominations that regularly gives a certain amount to the church.


Keep in mind your church is a charitable organization too. And so if you're not thinking about, if you tithe, for example, if you give a regular amount, a certain proportion of your income to your church every year, don't forget, that's probably tax deductible as well. So include that. I mean, you won't include your tithe in the bunching strategy because you probably do that every year, but definitely included in the amount that you're adding up to give to charity. So you might bunch up all the ones that are not the tithe, but remember that tithe counts too. So keep that in mind when you're thinking about it.

Speaker 1 (06:00):

What if I decide I'm going to do this, I'm going to bunch and I can't decide which organizations I want to. It's like, I don't want to figure this out now, but I've got to get the tax deduction. How does that work?

Speaker 2 (06:16):

Well, so there are tools that you can use so that you can bunch it and for tax purposes, make a donation but not necessarily have to give it to the organization yet. And one of the easiest things to use is something called a donor-advised fund. So a donor-advised fund is like a private little foundation that you get to contribute money to. You're contributing with a whole lot of other people, but you get to decide where your money goes, but you get to contribute it all at once. So you might make 3, 4, 5 years worth of contributions, and then every year you can dole a little bit of it out to the organizations that you want to support. So it can either be the same organizations over time, or it can be a different organization every year if you want to. But using a tool like a donor-advised fund can make that real easy. So it enables you to put a lot more away in one year and not necessarily know who you're going to contribute it to, or not necessarily make a multi-year commitment to a particular organization. You can put it away now, take the tax benefit and then give it out to those charities a little bit over time.

Speaker 1 (07:20):

I assume that is, there are organizations that, or funds or banks that do that, that offer that, and that's a service. So there's got to be fees involved, right?

Speaker 2 (07:31):

There are some little fees in it. Sure, yep. There are little fees in it, but it's really, it's not very much and certainly not significant compared to the tax benefits that you can get. But yeah, you can get whatever institution you're working with on your finances. They may have an avenue for that. Most, I keep most of my clients' funds where I manage them is that a private trust company and that private trust company has an agreement with a donor-advised fund. So if somebody wants to contribute to the donor-Advised Fund, we can do it right on that same platform. You and I are in the Rochester, New York area, and Rochester has a great community foundation, the Rochester Area Community Foundation, you can contribute through them, and they also have donor-advised funds that you can establish or you can contribute to. So there are lots of different avenues to get at that, but it's a great way to put away, especially if you have a particularly good year and you really want to take a lot more tax deductions.


If you really need to work down that income, you can make a large contribution to that. And then, like I said, gradually doll it out over the course of the next few years and get the tax benefit for it today. One other thing that I will suggest, and if you're using donor-advised, you can do this directly with a charity or you can do it with a donor-advised funds. One of the things that you may also want to keep in mind is that you don't necessarily have to give cash to those donor-advised funds or even to a particular charity. You can give appreciated securities. So if you bought Microsoft, if you bought Apple when Steve Wozniak was making you excited, chances are you have a very large unrealized gain in that stock. What you can do is you can gift some of that stock or gift some of that mutual fund directly to a donor-advised fund or to a charity, and that way you get the tax benefit of the market value of it today, and you don't have to realize the capital gain for taxation.


So you get sort of two tax benefits in one. So if you're charitably inclined and you want to do this kind of bunching strategy, you can do it and you can do with appreciated securities. And that's two ways of getting different benefits out of the same donation. And then finally, there's another way that you can take full advantage of a charitable donation, and this is regardless of whether you bunt or not, if you are of the age where you are taking required minimum distributions, and if you don't need it to pay your bills, you can direct those some portion or all of that required minimum distribution to a charity and it becomes a qualified charitable distribution. And so you take the RMD, but you don't have to pay tax on it because it went directly to a charity. So that's another way that you can get full tax credit for a charitable contribution. And this one works. This one only works if you're old enough to have required minimum distributions, but you don't have to bunch to be able to do it. It seems like that's

Speaker 1 (10:29):

A really convenient and easy way to do things.

Speaker 2 (10:31):

Yeah, if you're of that age and you're charitably inclined, absolutely, it's a great idea to use the QCD as a way of doing that philanthropic work that you would do anyway.

Speaker 3 (10:46):

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Speaker 1 (12:12):

RMDs, qcd, what's the little thing that you like to say

Speaker 2 (12:15):

That all of us co consultants love our TLAs, our three letter acronyms? Three letter. Yeah, exactly. So what's

Speaker 1 (12:23):

Your 30 minute action item for today?

Speaker 2 (12:24):

30 minute action item is take a look at the charitable work that you want to do this year. How much do you want to donate? And then figure out if bunching or some other strategy enables you to take more tax benefit this year.

Speaker 1 (12:37):

All right. Well, that's it for today. I'm Scott Fitzgerald from ROC Vox Recording and Production. Thanks to Steve Wershing of Focused Wealth Advisors for all his brilliance and wisdom, and we'll catch you next time at 30 Minute Money.