Episode 56: Tax Planning Strategies, Part 3: Donor Advised Funds & Bunching Strategies

Here are just a handful of the things that you’ll learn:

This episode marks part 3 of our 4-part series on tax planning strategies! This week, Jeff Montgomery and co-host Nick Craven briefly talk about a Donor Advised Fund, (DAF) which in its simplest form allows donors to make charitable contributions to a public charity and receive an immediate tax benefit. Later in the episode, Jeff and Nick focus the bulk of their discussion talking about bunching strategies.

(0:45) Practical Planning Segment:

A quick disclaimer here… after all we are talking about taxes! Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you’re a client I can’t give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that’s just common sense.

So, let’s tackle the concept of a Donor Advised fund (DAF.)  You know, last week we talked about qualified charitable distributions directly from your IRA account that can be done over the age of 70 1/2. If you are of RMD age which is currently 72 the Q CD will satisfy your required minimum distribution… as long as you do the QCD first. And we mentioned that this would be mainly for people that are charitably inclined.

Well let’s take that one step further!

In its simplest form, a DAF donor advised fund allows donors to make charitable contributions to a public charity and receive an immediate tax benefit.

They are held through a 501C3 organization. An account is set up for the donor fund, then they donate assets such as cash, securities or real estate to the fund. Donors are eligible to take an income tax charitable deduction at the time of the contribution. They then can grant money to any charities of their choosing, but they don’t have to do it right away. Donors can build up the fund overtime and make larger grants to charities in the future while immediately enjoying the tax advantage of their gifts into the fund.


(4:00) Advantages:


  1. Income tax deduction in most cases.
  2. Give a variety of different assets. Cash, securities, RE
  3. No capital gains tax when appreciated assets are sold
  4. No estate taxes
  5. Tax free growth
  6. AMT reduction: may reduce exposure to the AMT


OK so this leads to talking about what’s commonly referred to as bunching strategies.


Think about approaching tax planning two years at a time, not just for the calendar year with this strategy.


Folks Nick and I think about approaching tax planning actually over a much longer time frame, a lifetime. Part 1 of this series we discussed how important tax planning is vs tax preparation.


Micro thinking looks at tax preparation for the current year and how can you save taxes this year. Macro thinking looks at tax prep over many years or even a lifetime and asks the question “how can I save taxes over a lifetime?”


(7:00) Bunching strategies:  So, let’s understand a few concepts about itemized deductions versus taking the standard deduction and then I think this will shed some light on how a bunching strategy could possibly help you. For 2020 married filing jointly the standard deduction is $25,100. If you are over the age of 65 you do have additional deduction of $1350 each. For a total of $27,800


The standard deduction is so high now that most people don’t even itemize because their itemized deductions do not exceed the standard deduction. Last week you mentioned that approximately 90% take the standard deduction nowadays.


So, the basic strategy here is to take the standard deduction in one year and then itemize bunched deductions the next year.


Example, if possible, pay real estate taxes, mortgage payments, medical expenses, student loans, state taxes, and fund charitable contributions as much as possible in one year.


  • Many counties will let you split up your yearly property tax bill for example you can pay ½ in July and the other ½ in December. And they usually give you a grace period. So, if you pay the second half by December 31st your good……but what is you don’t pay it until Jan the following year and took advantage of the grace period. Well that another tax year!
  • Maybe there are medical procedures that you want to get but you keep putting off. With proper planning you could possibly accelerate them into the current tax year and maybe that year your spouse had some other significant medical producers done. Now you have a larger medical expense deduction. Remember the floor of 7.5% of AGI



(11:40) Coachable Segment: We started off talking about donor advised funds which lead into our discussion about bunching strategies. Well imagine if we combine those two, so here’s idea number one


Idea #1: Bunching donations in a single year to receive the maximum tax benefit. So, a gift to a donor advised funds are tax deductible (but you would still have to itemize), so donors can combine two or three years of charitable contributions in one calendar year and exceed the standard deduction in that year. They then can use the assets to consistently support their favorite charities even in years when they take the standard deduction.


(12:00) For Example: MFJ couple that normally gives $5,000 per year to charity. This couple could benefit from bunching their charitable contributions into 15,000 donation every three years instead of $5,000 every year.


Let’s say they have $10k max deduction of SALT taxes and $8,000 mortgage interest. Plus, the normal $5,000 to charity only gets then to $23,000.  The standard deduction is $25,100 and even more if they are over 65


In this example the couple itemizes in years one and four and takes the standard deduction in years 2,3,5 and six. So, in years 1 and 4 with the $15,000 DAF contribution they’re at $33,000…. well above the std deduction on those years and all the other years they are getting the MAX std deduction.


(14:10) Idea # 2: Combine the bunching of medical expenses along with the QCD if over RMD age of 72


Keep AGI low. Remember we have a 7.5% floor of our AGI to deduct medical expenses. How do you keep the AGI low? How about a QCD we discussed last week. If your over age of 72 and have to take an RMD and don’t need it or want it (and would like to make a charitable donation) complete a proper QCD, which is NOT considered income since it went straight to the charity and in turn does not show up on your tax return as AGI.


If we keep our AGI lower, it means we can deduct more of the medical expenses that we just bunched into one year.



REMEMBER, VERY IMPORTANT: Always consult your CPA!


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