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Jar of Change - Change - Coins - Saving Money by

Bunching/Bundling on the Rise

Jar of Change - Change - Coins - Saving Money by tradingacademy.comWhen the Tax Cuts and Jobs Act of 2017 was put into place, the standard deduction increased to about $12,000 for an individual and about $24,000 for a married couple. In a 2018 article, the Tax Policy Center estimated that the number of taxpayers that itemize their deductions would fall from 46.5 million into 2017 to 19.3 million in 2018. The Joint Committee on Taxation estimated that individuals would reduce charitable giving by $13 billion annually because their donations would no longer be tax deductible.

Since this time, “bunching” or “bundling” gifts for charitable giving has become an increasingly popular trend. Though not a new concept, this allows for people to still donate to their favorite charities while reaping tax incentives.

Instead of making yearly gifts in the same amount, people may bunch together their gifts and make a major gift every two to three years. The major gift would be itemized for that year, and the standard tax deductions would be taken for the other years until a donor decides to make another major gift.

Donors could either give that major gift to the charity directly, or they could create a donor advised fund (DAF), an alternative that is becoming increasingly popular because of its flexibility and immediate tax incentives. By setting up a DAF, the recipient organization holding it would be in control over that fund; however, the donor would have a say on how and when they would like to spread their gift.

The National Philanthropic Trust reports that the number of DAF accounts has increased by more than 100% the past five years and “outnumber private foundations by more than 5:1” – making it the “fastest-growing charitable giving vehicle.” The Trust also notes that in 2017, contributions to the 463,622 funds totaled more than $29 billion, and now estimates that DAFs hold about $110 billion in assets.

To illustrate how the concept of bunching gifts and how a DAF works, the American Endowment Foundation gives this example:

Before the change in standard deduction, a married couple used to donate $14,000 in each year. With the tax change, in order to still donate that amount and receive tax benefits, they created a DAF, contributing two years’ worth of donations at one time. The $28,000 in donations along with state and local taxes and mortgage interest at an estimated $10,000 would bring them to $38,000. They’d surpass the $24,000 standard deduction by $14,000, which would be an additional deduction. From their DAF, they would donate to their favorite charities.

The next year, they would not make any direct donations and would take the standard deduction. However, they would distribute funds from their DAF so that charities would benefit from their philanthropy. The next year, they may decide to make another “bundled” gift to the DAF as they did in the first year.

DAFs have their set of challenges and there are various thoughts on the distribution requirements. The trends show that donors continue to open them and see them as a benefit for themselves and charities, so continuing the conversation on them will be important.