Ep. 208 – Maximizing Tax Deductions

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the “bunching” charitable contributions strategy and how it can help you maximize tax benefits. They explain why bunching contributions strategy for 2-3 years is a powerful tool in helping you take advantage of standard deductions. 

Listen in to learn how to bunch your charitable contributions into one year using the donor-advised fund. You will also learn why the donor-advised fund is the most flexible version of giving through the bunching strategy.

In this episode, find out:

  • The powerful impact bunching charitable contributions has on your tax scenario.
  • How the donor-advised fund can help you overcome the standard deductions.
  • Why the donor-advised fund is the most flexible version of giving with a tax benefit.
  • How the bunching strategy allows you to gain deductibility by 2-3 years.

Tweetable Quotes:

  • “A donor-advised fund is a very key component of how we get to do the bunching strategy.”– Murs Tariq
  • “Think of the donor-advised fund as the vehicle that’s going to allow you to be able to group your deductions in one year.”– Murs Tariq


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Here’s the full transcript:

Radon Stancil:Welcome, everyone, to Secure Your Retirement podcast. Today we’re talking about taxes, but maybe not in the way that you thought about taxes if you just filed and you’re getting through that part of things. But what we’re going to be talking about is maximizing tax benefits by bunching charitable contributions. That’s a big mouthful. So what does that even mean? Why are we going to talk about that? Well, in order for us to really going to get into this, I think we have to kind of go through. And Murs and I are going to go back and forth and set the basis here for the conversation.
But in our tax code, the way the tax code has been set up is that if you’re single or married, it doesn’t matter, we all get what is called a standard deduction. It used to be everybody would itemize and itemize out all their deductions. So if you had things that you could deduct, like home interest or you had things like a charitable giving or anything that you could deduct, whatever it might be, you would put that in there and you would say, “Okay, let’s deduct it.” Well, now, the government has pretty much said, “We’re going to just say, instead of you having to worry about all those little things, we’re just going to give you one standard deduction.”
And the standard deduction in 2023 for a single person is $13,850. For a couple in 2023, it’s 27,700. So that’s a pretty good amount. And so sometimes the conversation comes up, “Well, if I give money to a charity, I really don’t get benefit because I’m going to get this standard $27,700 deduction. So I’ll give if I want to give, but I don’t really get benefit from it.” So what we want to talk about is how to maximize your deductibility.
And so we’re going to walk you through a scenario, and I’m going to do a what if scenario, but say, what if you did this in 2022 or you’re doing this in 2023, what could we do to maximize that deductibility? All right, we’re going to do some before and after here. So Murs, could you take us through this scenario, maybe, where what we’re doing is we’re looking at this idea of if we’d have done some deductibility, we had some deductions, maybe we did some charity stuff, what it could have looked like if we just had done, first of all our standard deductions?
Murs Tariq:Yeah. And I think something important to point out here is why this conversation even comes to light now is because back in 2017, the standard deduction for married filing jointly was 12,700. So if you do have someone that is charitably inclined or they do have a lot of expenses, medical expenses, all these different things, it was very easy to itemize. Today, it’s not easy to itemize because of where they took the standard deduction to, that 27,700 for a married filing jointly. And so let’s go to a case where someone is charitably inclined. And say they give $10,000 in the calendar year. And then they also have maybe $13,000 of other deductions. So that’s a total of 23,000 of deductions that they’ve come up with throughout the calendar year. Well, go back to 2017, that would default you to, well, I’ve got more deductions than 12,700, which was the standard back then. So it’s a no-brainer, I’m going to itemize this year.
But now, because of the standard deduction being raised to that 27,000 number, and you’ve got a total of 23,000 in deductions, it’s a no-brainer that all you would do is the standard deduction. And so people started asking the question, “Well, I’m giving all this money away. I’m donating. I used to get benefit for it, but because of where the standard deduction is today, I don’t really get the tax benefit from it that I used to feel.” And so that’s where this idea of bunching and it becoming a strategy has come into play. And the way that I think this becomes way more powerful is through this idea of a donor-advised fund. And we can go into how that works. It’s a very key component of how we get to do this bunching strategy.
But for example, let’s say that you do the same thing. If you’re giving 10,000 in one year, there’s a high chance that that’s kind of your run rate of I give about 10,000 a year every single year. And in the case of standard deductions, you’re just not really seeing that benefit. If you say, “Well, what if I was able to take the 10,000 I’m going to give in, let’s say, 2022, so the 10,000 I gave last year. And then I know I’m going to give 10,000 again in 2023 this year. So let’s say last year, rather than doing it year by year, I actually took the 20,000 that I was going to give in ’22 and ’23 and bunch it in tax year 2022 and into this account that lets me take advantage of that deduction for that calendar year 2022?”
All of a sudden the game has changed and now we’ve taken up our charitable deductions, although we’re not giving it all out in one year, but now we’ve got a kitty of a deduction of $20,000 that now adds to our itemization. And then we still have those other deductions of 13,000. And so now we’ve more than overcome the standard deduction and it makes it such more of a powerful type of impact to our tax scenario.
Radon Stancil:I was just going to say, I don’t mean to interrupt you, but I’m going to ask you a question on what you just said. So basically what Murs just described took my standard deduction of 25,900 in 2022 to now 33,000. So now I’m able to, like Murs said, I have a much more… And that’s going to save me some money because now I get to deduct even more in that year. I get above my standard deduction. Now, that doesn’t take anything away from 2023. In 2023, because I still get my standard deduction, even though I’ve already given my charity away. I’ve only got 13,000 of actual deductions but the government says I’m going to get 27.7.
So you might be listening to this and going, “Wait a minute, what are you talking about? How do I bunch these contributions, this charitable giving that I’m going to do into one year? Am I giving the charity 20,000 right now? I don’t want to give the charity 23,000 right now. I like the charity. I know people who say, ‘No, I want my church or wherever to get the money.’ I give them a certain amount of money every single year. They know what I’m doing. It’s the way I’d like to give it. I don’t want to give it all to them in one year and then give them nothing the next year because that’s hard for their budgeting. I want to spread it so they know I promised, I vowed I’m going to give them $10,000 a year.”
So now my question back to you, Murs, is you said this very quickly, you said donor-advised funds. So could you explain what a donor-advised fund is? Where would the money set? How would the charity get the contribution? How does that all work?
Murs Tariq:Yeah. The donor-advised fund, really think of it as the vehicle that’s going to allow for you being able to group your deductions in one year. So in the example we said, if we’re giving 10,000 on average, let’s go ahead and do two year’s worth of charitable giving, not to the church in this scenario, but we’re actually giving it to the donor-advised fund, which is basically an account held at a custodian that’s responsible for reporting it. And so it can be at Charles Schwab, Fidelity, Vanguard, all the custodians typically have them.
And now what that does is you fund it, and it can be done by cash, it can be done by stocks and other vehicles, but cash and stocks are going to be the most common. So you write a check to the donor-advised fund for $20,000. The money goes into this fund, and now it’s sitting in an account just like an investment account, an IRA, a taxable account. They’re accounts that hold money and can also be invested if you want them to. And now here’s the key thing that you have to understand about this type of account. It is an irrevocable gift to the charitable fund. And in this case, the charitable fund is you. You’re in complete control of how to use this fund.
And so if you’re on a pace of giving 10,000 a year to your church, well, as long as the company or the organization is one of those approved charitable organizations, all you’re going to do, rather than writing the check yourself, you’re going to type it into the computer while you’re logged into your donor-advised fund. And it says, “Write a check to my church for $10,000.” The company’s going to send out a check. It’s still coming from you, it’s coming from your donor-advised fund, and it’s still sent to the church just like you normally would.
But now we have this account that’s giving us this bunching strategy from a tax perspective every couple years to help us overcome the standard deduction. So the implementation of it, once we’ve decided what is the right number, how do we fund this, the implementation and the actual usage of it is very, very simple. The key here is that you’re in complete control. You give the money to the donor-advised fund and it’s now your fund that you get to do whatever you want. The next year, you may say, “Well, maybe I want to reduce my contribution to the church and maybe I want to add in another organization.” Absolutely, you can do that.
Radon Stancil:Yeah, I’m glad you’re going there, but I wanted to set that up. So when it comes to what I’m actually going to contribute to or give money to, I’m not having to make that decision upfront, correct? How does that work? I’m putting the money into the donor-advised fund, but am I having to pick the charity? First of all, that’s a question. Second of all, what if I want to give to multiple charities, not just one? And what if I want to give to one charity this year, but I want to give to a different charity next year?
Murs Tariq:So, it is completely flexible. Once you have put the money into the account, the only thing you have to understand there is that it’s irrevocable. And the reason it’s irrevocable, if you think about it, you just got a big deduction for funding into this account. The IRS just gave you a huge tax break, so they’re not going to let you just take it right back out the next year because you’ve already got the tax break on it. So the money that goes into the account is irrevocable. It’s been gifted. It’s been done with a future gift in mind. So the money’s in there. Now, you’re in complete control. You could give it to the church as planned. You could add in another organization. You could change how much you want to give. You can change from an annual donation to a monthly recurring donation, however you want to do it. And as long-
Radon Stancil:What if I make it to the next year and I don’t want to give anybody money that year?
Murs Tariq:Then you don’t have to. There is no rule that says you have to give out a certain amount a year or anything like that. So, in my eyes, it’s the most flexible version of donating because you’re still getting to do what you want and you’re not really committing to a pace or an amount or a timeline. So you’re still getting to do exactly what you want to do, but you’re picking up a little bit of a tax benefit that we’ve lost here over the recent years since the standard deduction has gone up.
Radon Stancil:So we use an example of a two-year bunching, but you could do a three-year bunching. So let’s go back to that same example of what Murs was bringing about. And he said you give on average $10,000 a year. You could put $30,000 into the donor-advised fund, which gets us more deductibility this year. Now, there’s a bit of a strategy there so I’m not saying that’s the right way. But I’m just letting you know that you could say, “Hey, I’ve got this money. I know I’m going to give this money away. Maybe it’s in my brokerage account, maybe it’s somewhere else. And I just want to transfer it so I get deductibility.” That’s really what this whole idea is about, this bunching strategy, is I take one or two or three years, typically. I mean, you can do more, but typically you don’t want to go more than that usually.
But that two to three or so years of bunching so that I can now get deductibility. And I’m still going to get my standard deduction on those other years so I’m not giving up anything. I’m gaining by doing that. And a lot of people don’t realize that. So if you say, “Well, I don’t give that much, I only give 5,000.” Well, maybe we need to bunch more years, but at least we get some benefit from it. Because if you’re going to give the five no matter what, you’re going to give the five, the 10 or 15 or whatever you give, let’s get some credit for it. That’s the idea behind it. And we don’t give up any kind of a thing where we’re locking ourselves into having to give the money to a particular organization.
So we’ve seen this strategy work and it’s one of those scenarios where you go, “Well, if I did all that and I could save 1,500 bucks, 2,000, $2,500 in taxes, is it worth it?” Well, we do. We think so. It doesn’t cost us anything, really, to go do this. It’s just understanding the strategy, understanding why it would work. So Murs, the donor-advised funds, where do you get those? You have to go buy those somewhere else or how does that work?
Murs Tariq:Most custodians are going to have them available. We work with Schwab so we know Schwab has a platform called Schwab Charitable. It’s pretty easy to set them up, and it’s all done in our virtual world that we’re in today. So you can create the account online. You can fund it online. If you have Schwab brokerage accounts, you can transfer money into them. You can transfer stock into them and get a tax break. We didn’t talk about there. And so I think it’s as easy as opening a checking account in the world that we live in today.
Radon Stancil:All right. So again, this is just an A strategy that could help you maybe save a few thousand dollars here or there when it comes to being able to, if you are charitably mindful, minded to do, it could be a strategy to employ. Now, I know we’ve gone through a lot of numbers. We do this a lot of times, and you’re maybe on a walk or you’re driving and you’re going, “Oh my goodness, y’all just went through all kinds of things.” Well, we have a blog written on this. Feel free to go to our website, which is pomwealth.net. Go to the blog page, you’ll see a whole article write-up on it.
Also, if you’d like to chat with us about any of these strategies, we’re glad to do that. You can go to the website, top right-hand corner. Click on schedule call, and we’ll be glad to hop on a call with you for a 15-minute complimentary, no obligation phone call to walk you through this scenario. We actually have software we could show you how it looks and how it would work. So please reach out to us if you’d like to learn more. We hope this has been helpful. Again, we’ll talk to you again next Monday with another episode of Secure Your Retirement.