You are here

Advisor's Quarterly Update

THE STRATEGY OF BUNCHING CHARITABLE GIFTS

The Tax Cuts and Jobs Act dramatically changed the tax landscape for itemizing deductions. The tax law that became effective in 2018 eliminated most itemized deductions, limited the deduction for state and local taxes to $10,000, and doubled the standard deduction. While the new law did not impose new restrictions on the income tax charitable deduction, the tax benefits of charitable giving will be lost for taxpayers with itemized deductions less than the standard deduction. However, bunching of charitable gifts is one strategy to maximize the tax benefits for generous clients.

What is bunching?

Bunching is a concept where charitable gifts that would otherwise have been spread over multiple years are bunched or accumulated and donated all in a single tax year. The goal is that bunching of multiple years of gifts and making a larger gift in a single tax year will increase the taxpayers itemized deductions above the standard deduction. In years when charitable gifts are not made and the taxpayer does not have sufficient deductions to itemize, the standard deduction is used to the taxpayer’s advantage. Strategic use of bunching gifts can result in substantial tax savings.

How it works

Here is how bunching can work. Let’s look at married taxpayers whose state and local deductions are limited to $10,000 a year. Assume they have no other itemized deductions, except for annual gifts to their favorite charities that total less than $15,000. They can make their charitable gifts each year but would not be able to itemize their income tax charitable deductions. Instead, they hold off making their annual charitable gifts they would have otherwise made for several years. When they are ready, they make larger gifts in one year that equal what they would have otherwise spread out over many smaller gifts. The goal is to create a bundle of charitable gifts made in one year so that the itemized deductions for that year exceed the standard deduction. The table below assumes a married couple whose annual itemized deductions, including charitable gifts would not exceed the standard deduction.

 

Four-Year Charitable Giving v. Bunching in Year 5*

  Year 1 Year2  Year 3 Year 4 Bunching in Year 5
State & Local Taxes $10,000 $10,000 $10,000 $10,000 $10,000
Charitable Gifts $7,000 $10,000 $8,000 $12,000 $37,000
TOTAL ITEMIZED DEDUCTIONS $17,000 $20,000 $18,000 $22,000 $47,000
Total Deductions 

$24,400 Standard Deduction

$24,400 Standard Deduction

$24,400 Standard Deduction

$24,400 Standard Deduction

$47,000 Itemized Deduction

* Assumes standard deduction in 2019 for married filing jointly of $24,400

 

In this example, by strategically bunching their charitable gifts that they would have otherwise made over a four-year period, they can take an additional $22,600 in itemized deductions in the year they bunch their gifts over the standard deduction.

Generally, if a taxpayer has itemized deductions other than their charitable deductions that exceed the standard deduction each year, they do not need to bunch their charitable gifts. Also, there is no advantage to bunching charitable gifts if the total of all deductions over a typical period of time, including charitable deductions, will still not exceed the standard deduction.

Donor-advised funds and bunching

A donor-advised fund can be used for a client who may wish to bunch multiple years of gifts into one year. With a donor-advised fund a client can make irrevocable gifts to a fund they have established and receive an immediate income tax charitable deduction so long as the deduction exceeds the standard deduction. The client can then suggest grants over time from their fund to their favorite public charities. A donor-advised fund is ultimately the client bunching gifts into their fund for future gifts.

Each client has unique tax and charitable objectives that need to be evaluated to implement the most effective tax strategy. The myth that many clients believe is that they will no longer receive tax benefits for their charitable gifts. That need not be the case.