‘Bunching’ Concept for Giving Can Result in Tax Savings

For example, if you had a favorite charity and planned to donate $5,000 to it every year for the next five years, your tax write off each of those years might be minimal.  But, if you were to donate $25,000 in a single year to cover the next five, your tax deduction likely would be much larger.

However, what if you weren’t sure that you’d still want to donate to the same charity in, say, years four and five?   Or what if you wanted to spread the money over several charities?   That’s where a Donor-Advised Fund or DAF could be the answer.

DAFs are offered by local charities and some major mutual fund organizations, and donations made to them are considered charitable and may be claimed on tax returns.  The DAF invests the funds, and the donor can recommend grants to IRS qualified charities to receive both the principal and income from the account.  The donor can split the monies among several charities, skip a year or more, and so forth.  One caveat:  a DAF cannot accept funds transferred from an IRA.

Another vehicle for temporarily delaying charitable giving decisions is called a Charitable Checking Account (CCA).  Unlike a DAF that is expected to last over a period of years, a CCA is expected to be distributed to charities within a short period of time and is similar to holding a cash equivalent investment.

The main advantage of a CCA is that it allows donors to take an immediate tax deduction and then later decide on specific charitable gifts.  For example, this could provide a “stepping stone” approach if one were to obtain an amount of cash by selling a business or other asset.   If that person wanted to give some of that money to a charity, but wasn’t quite ready to decide which one(s), a CCA could provide the temporary holding place – and the tax deduction could be made immediately.