The end of the year often prompts many of us to reflect on our charitable giving. For those who itemize their deductions, strategic planning can maximize the tax benefits of generosity. One increasingly popular approach is “bunching” charitable contributions, a tactic that aligns well with the higher standard deduction thresholds introduced by recent tax reforms.
What Is Bunching?
Bunching involves consolidating several years’ worth of charitable donations into a single tax year. By doing so, taxpayers can “bunch” enough deductions to exceed the standard deduction and itemize their deductions for that year. In subsequent years, they can claim the standard deduction. This alternating pattern allows individuals to aim to maximize their tax savings over time while continuing to support their favorite causes.
How It Works
Let’s use an example:
- The 2024 standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.
- If you’re married and typically donate $10,000 annually to charity, your total deductions, including other itemizable expenses like mortgage interest and state taxes, might fall below the standard deduction.
- Instead of spreading out your donations, you could donate $30,000 in one year, allowing you to itemize that year. For the next two years, you’d take the standard deduction.
Over a three-year period, this approach could result in greater tax savings while maintaining your overall level of charitable support.
Using Donor-Advised Funds (DAFs)
Donor-Advised Funds (DAFs) are an excellent tool for bunching contributions. These accounts allow you to make a lump-sum donation to the fund, claim the tax deduction in the year of the contribution, and then distribute the funds to charities over time.
This approach offers flexibility and helps ensure your favorite charities benefit consistently, even in years when you’re claiming the standard deduction.
Who Benefits Most from Bunching?
Bunching is particularly effective for:
- Moderate to high-income earners who regularly give to charity but don’t always have enough deductions to itemize.
- Taxpayers with fluctuating income, where bunching can coincide with high-income years to offset tax liabilities.
- Individuals nearing retirement, who may want to maximize deductions in their final high-income years before shifting to a fixed income.
Additional Considerations
- Coordination with other tax strategies: Bunching can work well alongside other strategies like contributing appreciated securities to charity. Work with your financial advisor to determine which tax strategies would complement your charitable gifting plan.
- IRS regulations: Ensure all donations meet IRS requirements for tax-deductibility. Maintain proper documentation, including receipts and written acknowledgments from charities.
The Bottom Line
Bunching charitable contributions can be a practical way to align your philanthropic goals with tax efficiency. By planning ahead and leveraging tools like Donor-Advised Funds, you can continue supporting causes close to your heart while striving towards optimizing your financial plan.
If you’re interested in exploring how bunching fits into your overall strategy, reach out to a financial advisor or tax professional. To read more on “bunching” donations, click here for a CNBC article featuring an interview from Marshall Financial President & Senior Wealth Advisor, Paula Nangle, CFP®.
At Marshall Financial, we can help clients integrate tax-smart strategies like bunching charitable contributions into their comprehensive financial plans. Contact us to learn how we can support your goals.
