Bunching for charity

A closer examination of The Tax Cuts and Jobs Act (Tax Act) opens the door to strategically planned giving for charitable contributions. The Tax Act practically doubled the standard deduction allowed but also placed limits on the amount a taxpayer can deduct for state and local taxes and property taxes. Because the standard deduction increased so dramatically, fewer taxpayers are expected to itemize their deductions. By donating more than usual to charity in a given year through a private family foundation (Family Foundation) or donor advised fund (DAF), taxpayers can exceed the standard deduction and itemize their deductions. As a result, the Tax Act has brought the concept of “bunching” charitable gifts to the center of countless tax planning conversations. 

Deduction Thresholds From 2018 - 2025

Bunching is simply a way to give more strategically and leverage your tax planning by grouping, or “bunching,” a few years of charitable gifts in a given year. Donors wish to spread their charitable contributions over time and many charities depend on loyal donors to make annual contributions. Imagine making a charitable gift this year sufficient to push you over the standard deduction – and build a charitable reserve for future years of gifting. 

Family Foundations vs. DAFs

Clients often form a Family Foundation to facilitate their charitable grant making. A Family Foundation is typically structured as a corporate entity in the state of residence and an application is made to the Internal Revenue Service for the tax exempt status. Family Foundations must then distribute five percent of net asset value from the Family Foundation annually, which provides a steady stream of charitable distributions. Family Foundations also allow families to have complete control over the foundation that serves a wide range of individuals and organizations – not only other public charities. Family Foundations can be extraordinary tools for families to come together and truly create a philanthropic legacy. 

Clients who do not wish to form a Family Foundation may choose a donor-advised fund (DAF). A DAF is a dedicated fund or account for charitable giving. Similar to a Family Foundation, the donor can select the name of the fund. Unlike a Family Foundation, there are no start-up costs, no ongoing legal or accounting fees and no requirement to distribute a specific amount annually. Family Foundations offer tremendous opportunities for clients who value philanthropy and wish for their Family Foundation to serve a specific purpose. With the advent of DAF, and the flexibility and ease of administration, DAFs have become increasingly popular. 

Donors contribute cash, appreciated public stock or other assets to the DAF and the cash or proceeds from the sale of assets are held in an account where they can be invested and earn interest. Fund holders, or “donor advisors,” recommend that the sponsoring organization make grants to specific charities. The only requirement is that the funds must be distributed to an organization with 501(c)(3) public charity status. Most broker dealers and wealth advisory firms offer DAFs as an option for clients. Many are surprised to learn that nonprofits such as Chicago Community Trust and the Jewish United Fund of Metropolitan Chicago also sponsor DAF programs. 

For instance, if Jack and Diane were married, they would easily reach the $10,000 limit for state and local taxes and property tax deductions. If they donate $14,000 to charity this year they would have made contributions sufficient to equal the standard deduction of $24,000. However, they could donate $28,000 to a Family Foundation or DAF this year and use the assets in the Family Foundation or DAF to support their charitable giving this year and next. By bunching a few years of charitable gifts, they are able to surpass the $24,000 standard deduction and benefit from itemizing deductions. Jack and Diane could then alternate between itemizing deductions one year and taking the standard deduction the next. 

A Family Foundation or DAF could also be used as a vehicle in your estate plan to act as the beneficiary of a traditional retirement plan and save more than 70 percent in estate taxes and income taxes.

Consider speaking with your attorney about whether a Family Foundation or DAF might be an appropriate vehicle for you and your family to leverage tax planning and philanthropy during your lifetime and upon your death. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Lindsey Paige Markus, Principal