Charitable Bunching Strategies: Maximizing Your Tax Deduction While Giving Back
Charitable giving is a meaningful way to support causes you care about, but it can also provide significant tax benefits when done strategically. One such strategy is charitable bunching, a method that allows you to maximize your deductions and make the most of your philanthropic contributions. At Bridge Law, LLP, we guide clients through the process of charitable bunching to help them achieve both their giving goals and financial objectives. In this article, we’ll explore what charitable bunching is, how it works, and why it may be an effective strategy for you.
What is Charitable Bunching?
Charitable bunching is a tax strategy that involves grouping, or “bunching,” multiple years’ worth of charitable donations into a single tax year. By doing this, you can significantly increase your itemized deductions in that year, allowing you to exceed the standard deduction threshold and receive a larger tax benefit. In other years, when you do not make a large donation, you can take the standard deduction.
The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the standard deduction, making it more difficult for many taxpayers to exceed that threshold through itemized deductions alone. As a result, charitable bunching has become a valuable strategy for those who want to maximize their tax savings while still maintaining a consistent level of charitable support over time.
What’s an Example of how Charitable Bunching Works?
To illustrate how charitable bunching works, let’s consider an example:
Imagine you are a married couple filing jointly, and the standard deduction for the year is $27,700. Normally, you give $10,000 annually to charity, and your other itemized deductions (such as mortgage interest and state taxes) total $15,000. Together, your itemized deductions would be $25,000, which is below the standard deduction threshold of $27,700. In this scenario, you wouldn’t receive any additional tax benefit for your charitable contributions, because the standard deduction is a greater deduction.
However, what if you used charitable bunching? For example, instead of giving $10,000 every year for 2 years, what if you bunched your charitable gifts into one year and gave $20,000 in a single year? With your other deductions, this would bring your total itemized deductions for that year to $35,000, allowing you to exceed the standard deduction and receive a larger tax benefit. The following year, when you make no charitable donations, you can simply take the standard deduction again.
Why Use Charitable Bunching?
There are several advantages to using a charitable bunching strategy:
- Maximize Tax Deductions: By grouping multiple years of donations into a single year, you can increase your itemized deductions, helping you exceed the standard deduction and maximize your tax savings.
- Flexibility in Timing: Charitable bunching allows you to choose when and how much you donate, giving you the flexibility to plan around years when you have higher income or anticipate a large tax liability.
- Maintains Consistent Charitable Support: Even though you may bunch donations for tax purposes, you can continue to provide consistent support to your chosen charities by using vehicles like donor-advised funds (DAFs) or other charitable accounts. This way, you receive the tax benefit up front while still being able to grant funds to charities over time.
Charitable Bunching and Donor-Advised Funds (DAFs)
For a more detailed article on donor-advised funds, click here.
One of the most effective ways to implement a charitable bunching strategy is by using a Donor-Advised Fund (DAF). A DAF allows you to contribute a lump sum in one tax year, receiving an immediate tax deduction, while distributing funds to charities over several years. This aligns perfectly with the bunching approach, as it enables you to manage the timing of your donations without compromising your ongoing support for the causes you care about.
With a DAF, you can invest the donated funds, allowing them to grow tax-free, which further increases the amount you can give to charities over time. This makes DAFs an ideal tool for those looking to combine tax efficiency with philanthropic impact.
Is Charitable Bunching Right for You?
Charitable bunching is a great option for individuals and families who typically give enough to charity to come close to or just below the standard deduction threshold. It’s particularly useful for those who have fluctuating income levels or anticipate large one-time income events, such as selling a business, receiving a bonus, or realizing significant capital gains.
At Bridge Law, LLP, our estate planning attorneys specialize in crafting tailored charitable giving strategies that fit each client’s needs and goals. We will guide you through the charitable bunching process, exploring tools like DAFs, charitable remainder trusts and/or charitable lead trusts, and other charitable gifting methods that align with your long-term financial and philanthropic objectives.
Get Started with Charitable Bunching Today
Charitable bunching is an effective way to enhance your giving power while maximizing your tax savings. If you’re interested in learning more about how this strategy can work for you, reach out to Bridge Law, LLP today. Our team is ready to help you build a customized plan that integrates charitable giving into your overall wealth management and estate planning strategy.
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