Since 2017, taking the standard deduction has truly become the standard. In fact, since the passage of the Tax Cuts and Jobs Act (TCJA), over 85% of Americans opted to take the standard deduction over itemizing deductions when filing their taxes. While this has simplified tax filing for many Americans, it has also created a disincentive to charitable giving. This is because the standard deduction makes it relatively more difficult to receive a tax benefit from philanthropic giving.
Most Americans, however, do not give to charity simply to receive a tax benefit. The numbers bear this out, with total philanthropic donations reaching $499 billion in 2022, an increase of over $100 billion from 2016, before the TCJA went into effect.
Bunching Charitable Contributions
Bunching donations is when you make two (or more) years of charitable contributions in a single year. The goal in doing so is to increase your total itemized deductions to an amount greater than the standard deduction. This allows you to itemize deductions for that year, and then take the standard deduction in the following years. This can be advantageous, as the same amount of charitable giving can lead to greater tax savings.
For information on standard versus itemized deductions, visit the IRS website.
To provide an example of how bunching donations works:
Let’s say you and your spouse file taxes as married, filing jointly. Each year, you give $15,000 to charity and have $10,000 in other itemized deductions. This would add up to $25,000 in total itemized deductions, which is less than the 2023 standard deduction of $27,700. If you did this every year, taking the standard deduction would seem to make sense. However, you would likely be missing out on additional tax savings by bunching your charitable contributions.
By bunching charitable contributions for both 2023 and 2024 into 2023, your total 2023 itemized deductions would equate to $40,000. This is $30,000 in charitable gifts and $10,000 in other deductions. Since $40,000 is above than the 2023 standard deduction ($27,700), you can itemize your deductions for a larger deduction. As your 2024 expected charitable gift was made in 2023, your 2024 total itemized deductions would be $10,000, less than the 2024 projected standard deduction of $29,200. This would allow you to take the standard deduction in 2024. By using this approach, your total deductions for 2023 and 2024 would be $69,200 ($40,000 + $29,200) instead of $56,900 ($27,700 + $29,200). This is an increase of $12,300 in deductions over the same two years, simply by bunching charitable contributions into one year.
CONCLUSION
There are many factors to take into account when deciding whether or not a bunching strategy is appropriate for you. These include current and expected income tax brackets, total expected gift amounts, and the needs of the charities that you may want to contribute to.
If you are interested in how bunching charitable contributions may reduce your overall tax burden, please reach out to your tax advisor.
Read our follow-up Q&A on donor-advised funds and the role they play when implementing a bunching strategy.
Author: Michael Gibb | President & CEO
Written: September 21, 2023