Deduction bunching

The strategy of deduction bunching is aimed at shifting the timing of deductible expenses by bunching them together within the same year, to surpass the standard deduction amount. The goal is to time your deductions in such a way that you can itemize every few years, while falling back on a high standard deduction in the interim years.

What’s difficult about deduction bunching is that the timing of most deductions cannot be changed. Some itemized deductions that provide some timing flexibility are medical expenses and state and local taxes (if you make state estimated tax payments). However, a quite common deduction that provides flexibility in both timing and amount, making it an ideal candidate for a deduction bunching strategy, is the charitable contribution.

Donor-advised funds

Many taxpayers maintain a consistent charitable giving approach that doesn’t change much year to year. This has been the preferred strategy for individuals and charities alike but with the rise of the standard deduction the tax benefits of such a strategy have diminished significantly. There is a vehicle that will allow you to make several years’ worth of contributions in one year, taking the tax deduction up front, all while retaining the benefit of spreading out your actual gifting over multiple years.

A donor-advised fund is a tax-exempt public charity through which donors can make contributions to a private account. Donors receive a full tax deduction in the year of contribution and then advise on how and when their charitable gifts are to be invested and ultimately distributed over the course of many years. Receiving a tax deduction for multiple years of charitable contributions in a single year makes deduction bunching a worthwhile tax strategy for many people. In addition to an immediate tax deduction for several years of gifting, contributions can build up tax-free for years before being distributed to a specific charity, compounding the benefit of the original gift.

A donor-advised fund is like a private foundation, but requires far less money, time, and effort to establish and maintain. As the fund’s sponsoring organization handles the legal, administrative, and filing requirements, the donor is free of the operational burden and can focus solely on the charitable nature of the fund. Donor-advised funds even allow donors to contribute marketable securities and other appreciated assets, in addition to cash. This not only facilitates the liquidation of the assets for contribution but also avoids any capital gains tax that would have been generated from the sale of the appreciated assets.

A donor-advised fund is a great option for those looking to streamline their charitable giving while not forfeiting the tax benefits. Its many advantages make the donor-advised fund a valuable part of any charitable giving and tax planning strategy.

For more information regarding donor-advised funds, please contact a Windward advisor at either our North Kansas City or Overland Park office today.