In 2017, the standard deduction was $6,350 for individuals and $12,700 for married couples. However, as a result of the Tax Cuts and Jobs Act (TCJA) of 2017, the standard deduction will almost double for 2018 (and years to come) to $12,000 for individuals and $24,000 for married couples. This means that an estimated 90% of households will now be better off taking the standard deduction rather than itemizing deductions.
This very high standard deduction means taxpayers who opt to make charitable contributions may not get the additional itemized deductions that they would have in the past, which is frustrating. However, with a little clever planning around charitable giving, taxpayers can create ways to exceed the standard deduction and start itemizing again, which will enable them to lower their tax bill.
Bunching is good!
Are you interested in giving to charity, but concerned about how the new tax plan limits your ability to deduct those contributions? An old method called “lumping” or “bunching” is making a comeback! This method involves “lumping” two years of charitable and other deductions into one single tax year. For example, if you make charitable donations in January and December of the same year, you may be able to itemize those deductions in that year to exceed the increased standard deduction for that year. The next year, you could take the standard deduction and forgo itemizing. With this method, you would receive a greater tax benefit for the same dollar amount of charitable contributions, just by cleverly timing those contributions. To accomplish this, you just need to think of your tax situation over a two-year period and time your gifts carefully. ®
For example, if Bill’s itemized deductions are $14,000 one year, he would be better off itemizing, as his itemized deductions are $2,000 higher than the standard deduction of $12,000. However, by implementing the “bunching” method and combining two years of charitable contributions into one year, he can automatically receive the standard deduction of $12,000 in one year and then he can simply make two years’ worth of charitable deductions the next year, which would further increase his deductions in that second year. As shown in the table below, by implementing the bunching strategy, Bill can increase his total two-year deductions from $28,000 to $32,000.
Increase Deductions by Bunching Over 2 Years