The Dunham Donor-Advised Fund offers various strategies to reduce taxable income and increase ways for you to leave a positive impact for your family to follow. The concept of charitable bunching may allow you to increase your tax savings by contributing multiple years of charitable deductions in one year.
Charitable bunching is aimed at tax years where you may have an unusual amount of taxable income that is not likely to reoccur in future years. In the event that this occurs, a charitably-minded taxpayer would simply shift the timing of their deductible charitable expenses by bunching them together within the same tax year.
Using the Dunham Donor-Advised Fund, you can make multiple-year contributions into the fund, receive an immediate tax deduction, and decide how and when your charitable gifts will be distributed over the course of many years.
In addition, those contributions can compound tax-free for years before being distributed to a specific charity. This can mean more significant contributions in future years.
As you will see in our case study, it can also be used when you are not receiving the full tax benefits your generosity should be providing to you and your family.
A married couple and their young children donate $10,000 a year to various charities they select as a family. Their contributions not only benefits the organizations they contribute to, but also gives them the ability to itemize their deductions above the $25,100 standard deductions for married couples filing jointly:
As you see from the numbers above, their deductions are their state and local taxes (SALT) that the IRS caps at $10,000 a year and $6,000 in mortgage interest. When they add their $10,000 in charitable contributions, they can now itemize their deductions as their philanthropic contributions give them total deductions of $26,000.
However, the standard deduction for a married couple is $25,100. This means that although they are donating $10,000 a year, they are only receiving a $900 additional deduction ($26,000 itemized deductions minus the $25,100 standard deduction).
They are in a 40% tax bracket, which means they have a $360 tax saving above the standard deduction of $25,100. Over a five year period, this would be $1,800 of tax savings ($360 x 5 years = $1,800).
Their financial advisor suggests they consider the Dunham Donor-Advised Fund and bunch five years of contributions into the fund. In a donor-advised fund, they decide when to make their charitable bequeaths so they can still donate $10,000 a year to their charities.
However, now their tax picture looks much different.
They still have the $10,000 deduction for the state and local taxes and the $6,000 for their mortgage interest. By placing five years of $10,000 contributions in their Dunham Donor-Advised Fund, they now have an additional $50,000 of charitable deductions they can use immediately for the tax year they donated.
Their tax numbers now line up as follows:
Remember, the standard deduction is $25,100 for a married couple. Their new itemized deductions are now $40,900 more than the standard deduction. At a 40% tax bracket, they have a tax savings of $16,360 compared to the $1,800 they would have had over five years.
In the next four years, they will still claim the standard deduction of $25,100, and they will allocate
the same $10,000 a year to their favorite charities.
Their financial advisor’s recommendation of bunching made sense in their situation. Since charitable giving was an essential part of their family’s financial plan, charitable bunching effectively unlocked extra deductions.
As the money in the Dunham Donor-Advised Fund awaits their philanthropic contributions, it has the potential to keep growing. The couple’s financial advisor will continue to invest the funds according to their growth and risk parameters.
To learn more, speak to your financial advisor. They will explain what options might be ideal for you and your family’s individual situation.
Find out how the Dunham Donor-Advised Fund can help you leave a positive impact for your family to follow.
(1) Please remember that there are annual income tax deduction limits for gifts made to public charities, including donor-advised funds. For contributions of non-cash assets held more than one year, like the hypothetical situation above, is 30% of adjusted gross income (AGI) for the tax year of the gift. It is 60% of AGI for contributions of cash. You may carry over donation amounts in excess of these deductions for up to five tax years.
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