The 2018 tax law almost doubled the standard deduction for most taxpayers.
If you filed a joint tax return, the standard deduction for 2018 jumped from $12,700 in 2017 to $24,000. Combined with the new limit of $10,000 on state tax deductions, many taxpayers who itemized deductions in previous years now benefit more by claiming the standard deduction.
With a little advanced planning, you may be able to increase your tax deductions by timing when you make charitable contributions.
“Bunching” Charitable Contributions
Bunching charitable deductions is a tax strategy where you alternate between taking the standard deduction one year and itemizing the next.
The strategy is best illustrated with a simplified example (note: the example does not factor in inflation, so consult with your financial advisor when planning for your specific needs).
Let’s assume a couple typically donates $6,000 to charity each year and this year, they have the following expenses:
The total of these items is $25,500 — less than the $29,200 standard deduction for couples in tax year 2024. So, they claim the standard deduction and will not itemize. In other words, they will deduct $27,700 regardless of the $6,000 they donated to charity.
Instead of donating $6,000 in a single year, this couple could consider “bunching” its donations by making two $6,000 donations, for a total of $12,000 in 2024. And, make no donations next year in 2025.
Using the same example above, an additional $6,000 (totaling $31,500) would put them over the standard deduction and they would itemize. Next year, they might not itemize.
The same “bunching” strategy would be repeated every other year. Only the timing of the donations would change, and the amount of support would stay the same over time.
What If My Favorite Charity Needs the Funds Every Year?
Many charities depend on loyal donors to donate a certain amount every year. One way to meet both of your goals is to make your charitable contributions through a donor-advised fund (DAF) at San Diego Foundation.
You receive a tax deduction when you transfer the cash or other assets to your DAF. You then grant the money to your favorite charity each year at the timing you and the charity expect.
FAQs on Bunching Charitable Donations
1. What is bunching charitable donations?
Because the 2018 tax law almost doubled the standard deduction for taxpayers, the”bunching” strategy was introduced to provide tax benefits to donors who may otherwise never itemize their tax returns. “Bunching” charitable deductions is a strategy where you alternate between taking the standard deduction one year and itemizing the next to exceed the standard deduction threshold and maximize tax benefits. This results in tax benefits for donors while providing the same support for their favorite nonprofits over time.
2. How does bunching charitable donations work?
In bunching, donors make two years’ worth of charitable contributions in a single year to itemize deductions. In the subsequent years, they take the standard deduction until it’s time to bunch again.
3. What are the tax benefits of bunching donations?
Concentrating donations in one year can allow donors to exceed the itemization threshold, thus increasing their tax deduction for that year. This can result in significant tax savings in the years in which donor itemize.
4. How often should I consider bunching my donations?
The frequency of bunching depends on your financial situation and charitable goals. Many donors opt to bunch every two years, but the intervals can vary.
5. Who can benefit from bunching charitable donations?
Individuals or families with significant charitable giving who find their total annual deductions close to or just above the standard deduction threshold can benefit the most from bunching.
6. What types of charities can I donate to using the bunching strategy?
You can donate to any qualified charitable organization, including public charities, religious organizations, educational institutions and donor-advised funds (DAFs) at community foundations.
7. Can I use a donor-advised fund (DAF) for bunching donations?
Yes, DAFs are an excellent vehicle for bunching. Donors can make a large contribution to their DAF in one year, receive the tax deduction, and then recommend grants to charities and initiatives over multiple years.
8. What records do I need to keep when bunching donations?
Keep detailed records of all charitable contributions, including receipts, acknowledgments from charities, and documentation of the donation amounts and dates. This is essential for substantiating your deductions during tax filing. Donating to a DAF at a community foundation eases this burden, as all of your charitable tax documentation will be in one place, even though your grantmaking may go elsewhere.
9. How does the bunching strategy affect my overall financial planning?
Bunching donations should be integrated into your broader financial and tax planning strategies. Consult with a financial advisor or tax professional to ensure it aligns with your long-term financial goals.
10. Are there any potential downsides to bunching charitable donations?
One potential downside is the irregularity of donations, which might impact the cash flow of the charities you support. However, this can be mitigated by using a DAF to distribute grants consistently over time. Additionally, changes in tax laws could affect the benefits of bunching, so staying informed and flexible is crucial.
Charitable Contributions 2024 Standard Deduction
The tax year 2024 adjustments described below generally apply to income tax returns filed in 2025.
- The standard deduction for married couples filing jointly for tax year 2024 rises to $29,200, an increase of $1,500 from tax year 2023.
- For single taxpayers and married individuals filing separately, the standard deduction rises to $14,600 for 2024, an increase of $750 from 2023;
- For heads of households, the standard deduction will be $21,900 for tax year 2024, an increase of $1,100 from the amount for tax year 2023.
The larger standard deduction means some donors are less likely to receive a tax benefit for their charitable contributions unless they apply charitable bunching strategies.
Please consult your tax advisor and a charitable planning expert at SDF to help ensure your charitable donations continue to work for you and your favorite charity.
