The Tax Cuts and Jobs Act (TCJA) passed late last year, bringing about some of the most comprehensive changes in tax law in decades. The most discussed and impactful changes for most individuals include the lowering of tax rates, increased standard deduction and suspension of personal exemptions, a higher phase-out threshold for the child tax credit, and various itemized deduction changes. From a tax planning perspective, it is important to note that due to the increased standard deduction, a larger percentage of individuals will no longer itemize. For those who are right on the cusp of benefiting from itemization – $12,000 (single) or $24,000 (married filing jointly) – there is still one tax planning strategy surrounding charitable contributions that could produce a benefit.
Bunching or bundling of itemized deductions is where a taxpayer chooses to “bunch” donations to charities in a specific year while limiting donations in the subsequent year. Essentially, the taxpayer gives the same amount to charities; however, the timing of when they do so allows them to benefit from the contribution if they are below the standard deduction threshold.
The best way to explain this is through an example:
- For the 2017 tax year, a single taxpayer chose to donate $2,000 charitable organizations and had $10,000 of mortgage interest and real estate taxes. Therefore, this taxpayer would itemize because the aggregate deductions ($12,000) is larger than the standard deduction for 2017 ($6,350).Now, given the same set of facts as before but for the 2018 tax year, this single taxpayer would take the increased standard deduction of $12,000 instead of itemizing, and would therefore not receive any extra benefit from the $2,000 of charitable donations.
If the taxpayer donates $2,000 annually to charities, bunching the deductions in one year will benefit the taxpayer. With bunching, this taxpayer could donate $4,000 in 2018 and $0 in 2019 (still averaging $2,000 per year) and would itemize in the year of bunching. This timing would allow the taxpayer to receive an additional $2,000 deduction ($14,000 – $12,000) by itemizing.
By alternating tax strategies between itemization and standard deduction like the example above, taxpayers can reap the benefits of philanthropic giving while also receiving beneficial tax deductions, and in turn, non-profit organizations retain their typical level of donated support. For any further questions regarding your specific situation, please contact your Blue & Co. tax professional.