The U.S. federal tax code underwent massive changes in 2018. Because of these changes, many folks found they weren’t getting the refund amount they normally did. In some cases, people who typically received a refund actually owed the IRS.
Three major factors contributed to these results:
- The standard deduction nearly doubled. Many people who normally itemized their taxes and received a higher deduction found their qualified expenses didn’t exceed the standard deduction this year — so they saw no additional tax benefit.
- State and local tax (SALT) deductions were capped at $10,000. Even if couples filed separately, they were held to a household cap of $10,000. For a dual-income household, this often wasn’t enough to offset tax liabilities.
- Reduced withholdings. The federal government reduced the withholding amounts. If people didn’t adjust their allowances accordingly, many found that at the end of the year, their withholdings didn’t meet their actual tax liability.
The impact to charitable giving
One concern about these changes was that charitable giving would decrease. And it did, among folks who give less than $5,000 per year. They knew they weren’t going to see a tax benefit from their contributions due to the high standard deduction, so many withheld their giving.
The good news is that many people who give significant amounts each year continued giving — and even gave more than usual in order to get full tax benefits with the new standard deduction. This is what we call “bunching” — and it’s a strategy from which more taxpayers could benefit.
Bunching in brief
“Bunching” is when you frontload your charitable giving and give two or more years’ worth of donations in a single tax year. The goal of making such a sizable single gift is to exceed the standard deduction in order to see a tax benefit over time.
Tools and strategies
There are a few things to keep in mind to get the most out of bunching.
- Use a donor advised fund. That way, you get the large tax deduction and still have access to the money during the “off” giving years to advise grants to your favorite causes, charities, and churches. With a donor advised fund, your charities won’t feel the “feast or famine” effect of your bunching.
- Donate appreciated assets. When you give stock, real estate, and property, you not only increase your qualified expenses, you also avoid capital gains taxes.
- Give as much as you can. This is how you’ll get the most benefit out of the strategy. Consider combining various gift types and giving strategies. For example, you might direct your IRA’s required minimum distributions to your parish and use appreciated stock to open a donor advised fund.
The future of giving
As far as the new tax code goes, we’re in a period of transition. We’re still learning all of the effects. But we know one thing hasn’t changed: The generosity of our Catholic community. Catholics always find ways to give. And, finding ways to give prudently is a key strength of the Catholic Community Foundation.