How “Bunching” Your Charitable Contributions Can Provide Tax Savings
As 2020 comes to a close, year-end charitable contributions are likely on your mind – and the deductions that come along with them. One lesser-known tax-saving strategy is “bunching,” which is the process of taking more than one year’s worth of deductions all in one tax year.
Bunching became more popular with the passing of the Tax Cuts and Jobs Act of 2017 (TCJA), which included an increase to the standard deduction – nearly doubling to $12,000 for singles and $24,000 for married couples who file jointly. Before the TCJA of 2017, we know that about 69% of filers claimed the standard deduction. This jumped to about 86% after the TCJA — nearly 30 million more households.
“Bunching” your charitable giving
One way to boost the tax benefits of charitable giving is by “bunching” donations into alternating tax years to surpass the itemization threshold.
Consider a single taxpayer in 2020 who traditionally donates $10,000 to her church every year with other itemized deductions (property and state income taxes) of $5,000 for a total of $15,000. Without bunching, she would receive an itemized deduction in excess of the standard deduction ($12,400) of $2,600.
Assuming she is in the 22% tax bracket ($40k-$85k taxable income), she would receive a federal income tax savings of $572 ($2,600 x 22%). If she bunched her deductions into one year she would save $2,772 ($10k + $10k + $5k = $25k less $12,400 = $12,600 * 22%) in federal income tax for year one and lose the $572 extra saving in year two for a net federal income tax savings of $2,200 over two years. That is the tax benefit of bunching with no difference over two years in your charitable donations given.
If she does not want to burden the church’s budget committee with a large donation in one year and none in the next, then she could contribute to a Donor Advised Fund (DAF). A DAF, which organizations including the Catholic Foundation of Michigan have in place, can spread those donations over multiple years. You get a charitable donation for the $20,000 gift to the DAF in year one and then you instruct them to make a $10,000 donation to your church each of the next two years. Also keep in mind that charitable contributions can come in various forms, including cash as well as appreciable securities, or investments.
Is “bunching” right for me?
While bunching can be a significant tax savings for some, one reason people may not want to use this strategy is the cash requirement to gift up front. Therefore, it may not be for everybody. It’s smart to talk through year-end planning and possible tax strategies for your particular situation with a trusted tax professional.
Thomas W. Wiggins, CFP®, CPFA, M.S.M, Preferred Professional Advisor
Thomas W. Wiggins is a Private Wealth Manager with Rehmann Financial. His work focuses on comprehensive financial planning, investment analysis and portfolio design, qualified and non-qualified retirement plans, retirement and estate planning, risk management. An active participant in community endeavors, Tom serves 100 Businesses Who Care, Butler University (parent’s council), Catholic Foundation of Michigan (preferred advisor group) and Rochester Downtown Development Authority (business development committee). He previously served on the Rochester Hills City Council and the Rochester Avon Recreation Authority’s board of directors.