Further, most of the materials I have seen fail to mention there is no step up in basis at the death of the owner, making these even less attractive for many potential investors. The offers I have seen remind me of the real estate limited partnerships, tax credit deals and non-traded REIT messes I have seen over the last 30 years.

I like the concept generally but hope Congress can offer stronger initial incentives, a longer time fame for people to obtain those benefits, and a longer time frame for sponsors to organize themselves. Until then, I also hope most financial planners will better serve their clients by letting their fiduciary instincts kick in and rather than biting at the lure of an intriguing but modest tax break, will choose to look at other ways to manage capital gains tax exposure.  

Bunching Deductions To A Donor Advised Fund

This is the second December that it seems like every financial-focused consumer and trade publication has an article with someone touting bunching deductions and donating to a donor advised fund.

Understand, both bunching deductions and using donor advised funds have been perfectly legitimate strategies for years. I label this overhyped because I only need one hand to count the number of people I have seen do this during the last two years.

The first cause of the low adoption rate is the larger standard deduction. For non-itemizers, combining deductible expenses for more than one year into an expense in a single year can be a fine technique. Of the deductible expenses, charitable donations are the most controllable. This makes them attractive for bunching purposes.

However, because the standard deduction is so high, there are fewer deductions allowed and some deductions are more limited, the gap between the amount of the standard deduction and the total of itemized deductible expenses is larger than ever. This means taxpayers must bunch larger amounts to attain a deduction greater than what they would have received without bunching. The gap makes the payoff more modest and the technique less appealing.

For many taxpayers, the payoff is not attainable. They simply don’t have the means to make a large enough donation to get any extra deductibility. We see this often with retirees who have owned their home a long time (low property taxes), have no mortgage (no interest deduction), and are relatively healthy or have good insurance (no medical expense deduction). Due to age, many get an even larger standard deduction than younger couples, making the gap larger.

Further narrowing the number of people that will execute this strategy is the nature of donor advised funds (DAF). While a DAF can be a pretty cool vehicle, there is nothing special about a DAF as a recipient of a donation from a tax standpoint. It is an easy way for people to create a pot for doling out funds to multiple charities or over multiple years, but many people seem to have their favorite causes. The same tax effect would be received if the bunched donations were given to one of these favored non-profits outright, whether it be the Red Cross, a church, an alma mater or the Foundation for Financial Planning.

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