Charitable contributions aren’t just a way to support your favorite charity. They can also be a smart tax planning strategy. Here’s what you need to know about bunching your contributions, and how it can minimize your overall tax liability while maximizing your charitable impact.
What Is Bunching?
To understand bunching, it’s helpful to understand charitable contributions, first. An individual may choose to contribute to a charitable organization in the form of cash or non-cash assets, such as real estate. These contributions can later be deducted.
Bunching, then, refers to when the donor groups multiple years’ worth of contributions into a single year, and then do not give the following years. For example, if you gave two years of charitable contributions in one year, you would give to your charitable organization the first year and give nothing the next year.
How Does Bunching Work? What Are the Benefits?
When filing your taxes, you have two options: take the year’s standard deduction or claim your itemized deductions. For the 2022 tax year (for which you’ll file taxes in 2023), the standard deduction is $12,950 for single filers or married taxpayers filing separately and $25,000 for married taxpayers filing jointly.
If your aggregate itemized deductions exceed the standard amount, it’s wise to take the itemized deduction. If it doesn’t, you’d want to take the standard deduction.
Where does bunching come in? Let’s say you typically give $4,000 annually in charitable contributions and have $6,000 in property taxes and mortgage interest. You would take the standard deduction of $12,950 because it is higher than your itemized deduction of $10,000.
If, instead, you bunched your contributions and gave $8,000 the first year and $0 the following year, you would itemize in the first year with total deductions equaling $14,000 (your $8,000 contribution + $6,000 in aggregate deductions). The following year, you would take the $12,950 standard deduction. Over those two years, your total deductions
would equal $26,950 instead of, if you didn’t bunch, $20,000. If your federal income tax rate is 22% for the 2022 tax year, that $6,950 difference equals $1,590 in savings.
Note: Contributions in the example above must’ve been made by December 31st, 2022 to count towards the 2022 standard deduction.
When to Bunch
When you want to contribute to a charitable organization you care about
Tax benefits aren’t always the main reason individuals make a charitable contribution. Many times, they simply want to support an organization they care about. Bunching your contributions allows you to contribute to a good cause while, as a bonus, lightening your tax obligations.
When you see an increase in your taxable income
If, for example, you sold a business or received a large inheritance and find yourself with $1 million in taxable income, you might choose the bunching strategy. Let’s say you normally give $20,000 per year. Bunching together three years would allow you to claim a $60,000 deduction for that tax year. In these cases, individuals may choose to open a donor-advised fund account, which allows them to itemize their deductions while still having money go to their charitable organization in the following two years.
When you’re almost able to itemize your deductions
If you’re not far off from being able to itemize your deductions, bunching your charitable contributions can push you over the threshold and give you access to savings that you wouldn’t receive otherwise.
Charitable Contributions: Rules & Guidelines to Know
Contribution deadlines
Contributions must be made by December 31st of the tax year during which you want to claim a deduction. For example, to claim a deduction while filing taxes in 2024, your contributions must be received and processed by December 31st, 2023.
Contribution limitations
In 2021, the IRS allowed taxpayers to deduct 100% of their charitable contributions. For 2022, however, the ceiling for cash contribution deductions is 60% of your adjusted gross income (AGI). Cash contributions to qualified organizations are capped at 50% of the donor’s AGI. These numbers will continue through 2025.
Qualified organizations
Sometimes, you can donate to a charitable organization that is not an IRS-qualified, 501(c)(3) organization. However, if you’re using a donor-advised fund, you must give your charitable contributions to a qualified charity. If you have an organization in mind, you can go to the IRS website to verify its eligibility to receive a deductible contribution.
Do you want to know more about whether bunching is the right strategy for you? We’re here to help with our holistic approach to financial planning. Connect with us today to learn more.
