Use a DAF to optimize your charitable deductions across tax years.
We all know one of life’s greatest certainties all too well: taxes. Using a donor advised fund (DAF) can make it easier to itemize your charitable deductions – but what if your charitable contributions don’t usually surpass the standard deduction threshold? DAFs can be excellent generosity-maximizing tools in this case, too. Many of our donors decide to use a giving strategy called charitable bunching to maximize tax deductions and maximize what they are able to give.
The 2022 standard deduction for married couples filing jointly is $27,700; for single individuals the standard deduction is $13,850. Therefore, taxpayers may only benefit from itemizing their tax deductions if their total deductible amount exceeds those figures.
Taxpayers who donate significant amounts to charities each year but still find themselves slightly below the standard deduction threshold may want to consider bunching itemized deductions.
Bunching deductions is, in short, contributing more than one year’s worth of charitable contributions in a single tax year. This is also known as charitable bunching, and it can help minimize your tax burden in the long run and maximize what you can give to charity.
DAFs are a fantastic tool for a charitable bunching strategy. Since a contribution to a DAF at a DAF sponsor (like The Signatry) is a gift to an exempt nonprofit organization, a donation into a DAF is eligible for a tax deduction in the year you make the donation, even if the funds are not granted out in that same year.
Scenario 1: Annual Charitable Giving
The Jones family give $8,000 to their church every year. In 2023, they also have $15,000 in other deductible expenses, bringing their total deductions to $23,000. This amount is lower than the 2023 standard deduction ($27,700).
2023: $8,000 (charitable giving) + $15,000 (miscellaneous) = $23,000 in deductions
2024: $8,000 (charitable giving) + $15,000 (miscellaneous) = $23,000 in deductions
In this scenario, it is smarter for them not to itemize. They will take the standard deduction in 2023 and in 2024 ($29,200), for a total deduction of $56,900 across both years.
Scenario 2: Bunching Charitable Deductions
The Jones family are able to increase their giving to $16,000 in 2023: They donate the usual $8,000 to their church and donate the remaining $8,000 into a DAF.
They can now itemize their tax deductions this year:
2023: $16,000 (charitable giving) + $15,000 (miscellaneous) = $31,000 in deductions
Next year, they can recommend a grant through their DAF to support their church and still receive the 2024 $29,200 standard deduction.
2024: $0 (charitable giving) + $15,000 (miscellaneous) = $15,000 in deductions
In this scenario, they will itemize their deductions in 2023 and choose to take the standard deduction in 2024 ($29,200), for a total deduction of $60,200 across both years.
Bunching tax deductions—charitable gifts or other deductions—is one great way to expand your generosity. It can provide you with more flexibility and opportunity to give. Ask your financial advisor if this strategy could apply to your situation.
Learn More about Donor Advised Funds to empower your Charitable Bunching Strategy
Discover what a donor advised is, how it works, and the potential tax benefits of using this charitable giving strategy.How It Works