By Michael Torney, CFP, J.D., LL.M.
Many of my clients donate money to their favorite charities. I understand their passion. My wife and I are avid, long-time supporters of The Muny – St. Louis’ outdoor theater – and the Missouri Botanical Garden. It gives us a lot of joy and satisfaction to support causes that benefit our community.
However, many people making annual charitable contributions are missing out on significant tax savings. Instead of writing a check every year, they can save money by taking advantage of a strategy called charitable bunching. As you begin to consider making a donation before December 31, here are three ideas aimed at enabling you to give the same amount, have that money invested for future donations, and save on your taxes.
“Bunch” Several Years of Donations in 2022
Bunching is a way to “front-load” your gift by making a contribution equal to five years or more of your usual donation in the same year. For example, a person who would normally contribute $25,000 each year would donate at least $125,000 in 2022.
By itemizing this contribution with other tax deductions, a person’s taxable income drops significantly for the 2022 tax year. Then, in years two through five, the standard federal income tax deduction is used instead of itemizing deductions. For many households, this strategy ends up with more federal deductions over the five-year period than gifting $25,000 each year – your financial advisor can run a tax projection to determine whether this would benefit your tax situation. This strategy can also be combined with the donor-advised fund strategy and appreciated stock strategy described below.
Work With Your Financial Advisor to Establish a Donor Advised Fund
This large, one-time large contribution to be placed into a Donor Advised Fund. This fund invests the money, and it is earmarked only for charitable contributions. At your direction, the money is donated to the nonprofits of your choice, over the time period you desire.
Here’s an example of how it can work:
For a couple in the 35% federal income tax bracket, bunching contributions into a Donor Advised Fund might increase their federal tax deductions by approximately $30,000 over five years compared to writing a check every year:
- Annual Donations: By donating $32,000 annually to charity – plus $10,000 in other deductions – the couple has $42,000 in itemized deductions. That’s $210,000 in deductions over the five-year period.
- Donor Advised Fund: Instead, in 2022, the couple donates $160,000 to nonprofits. With the additional $10,000 in deductions, they have $170,000 in itemized deductions this year.
- By using the standard federal income tax deduction from 2023-2026, they will still have more than $70,000 in deductions over the five-year period compared to giving annually. And that translates into $30,000 in increased tax deductions.
Finally, Make Donations in Common Stock That Has Appreciated in Value
Because many investors’ portfolios have increased significantly over the last decade, there’s another way to save: gifting appreciated common stock in after-tax investment accounts to a Donor Advised Fund. By donating appreciated stock, you can avoid all capital gains taxes.
For example, a person who bought Apple Inc. shares in 2012, when it closed the year at $16.34 per share, will be able to make a significant contribution by selling it before year-end. That’s because Apple is now valued at more than $140 per share. And, of course, the nonprofit will not pay any taxes from this donation.
As you consider making any charitable contributions before December 31, feel free to contact us with any questions at DuffTorneyteam@monetagroup.com. We offer a free consultation to discuss how we may be able to develop a comprehensive tax strategy aimed at maximizing the value of your contributions.
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