The Definitive Guide to Bunching Charitable Donations

The 2017 Tax Cuts and Jobs Act significantly altered deductions by nearly doubling the standard deduction for both individuals and married couples. This change led to fewer taxpayers itemizing deductions, as the higher standard deduction made it less advantageous to do so. Consequently, many charitable donations, along with other itemized deductions like mortgage interest and state and local taxes, became less impactful for tax purposes.

One such strategy gaining traction among savvy donors is bunching charitable donations. “Bunching” or “bundling” charitable donations refers to grouping donations from multiple years into a single tax year, thereby surpassing the standard deduction to take advantage of tax deductions like charitable giving.

This comprehensive guide delves into the nuances of this approach, its benefits, potential drawbacks, and the pivotal role of donor-advised funds (DAFs) in executing it effectively.

Should I bunch my charitable donations?

Whether or not you should bunch charitable donations hinges on various factors, including your financial situation, tax considerations, and philanthropic goals. Like many charitable giving strategies, bunching involves consolidating several years’ worth of charitable contributions into a single tax year, allowing you to surpass the standard deduction threshold and itemize deductions for maximum tax efficiency.

However, before embarking on this strategy, it’s crucial to evaluate your ability to front-load donations and maintain consistent giving levels in subsequent years. Additionally, assess whether bunching aligns with your long-term financial objectives and charitable intentions.

The role of the donor-advised fund (DAF) in bunching charitable donations

A cornerstone of the bunching strategy is leveraging a donor-advised fund (DAF) to facilitate the aggregation and management of charitable contributions. DAFs are philanthropic vehicles administered by public charities that offer donors a flexible and tax-efficient mechanism for charitable giving. Simply put, it allows donors to derive important benefits of giving to charity from a tax perspective.

By contributing a lump sum to a DAF in a high-income tax year, donors can immediately realize the tax benefits while retaining the ability to recommend grants to qualified charitable organizations over time. This allows for strategic distribution of funds, potentially maximizing impact while minimizing administrative burdens.

Read more: DAF vs. private foundation: what’s the difference?

Pros and cons of bunching donations

Before delving into the strategy of bunching charitable donations, it’s important to weigh the advantages as well as the potential drawbacks. While bundling offers a number of advantages, it may not be ideal for all donors in all situations:
Pros:

• Tax efficiency. Bunching charitable donations can derive the best tax deductions for high-income earners above the standard threshold, resulting in substantial tax savings in the year of contribution.
• Strategic giving. DAFs afford donors the flexibility to time distributions based on changing financial circumstances and charitable priorities.
• Simplified administration. Consolidating donations into a single fund streamlines record-keeping and simplifies the grant-making process.

Cons

• Cash flow constraints. Bunching requires upfront funding of multiple years’ worth of donations, potentially straining liquidity in the short term.
• Uncertainty. Future changes in tax laws or financial circumstances could impact the efficacy of the bunching strategy.
• Investment risks. Donors should carefully consider the investment options and fees associated with DAFs, as investment performance can affect the fund’s ability to support charitable giving.

Bunching charitable donations calculator

Depending on the number of years you want to bundle together, the total amount of charitable donations being considered, and other factors like your tax bracket and philanthropic goals, the actual process of calculating the benefits of bunching your charitable donations can be incredibly involved, and will likely require the assistance of a tax professional.

That said, as you consider this strategy, the following information will be needed to assess the potential tax savings, compare scenarios, and determine the optimal timing and amount of charitable donations to bunch:

• Tax filing status
• Annual income
• Estimated standard deduction
• Estimated itemized deductions
• Current annual charitable contributions
• Number of years to bunch

In simple terms, a typical bunching charitable donations calculator would:

• Total the charitable contributions for bunching by multiplying the current annual charitable contributions by the number of years to bunch.
• Determine the bunching deductible expense by calculating the total amount of charitable contributions for bunching, which will be used to exceed the standard deduction threshold.
• Add the bunching deductible expense to the estimated itemized deductions (excluding charitable contributions) to find the Itemized deductions with bunching.
• Produce the potential tax savings with bunching by calculating the tax savings resulting from itemizing deductions with bunching compared to taking the standard deduction.

This model illustrates how a bunching charitable donations calculator can assist individuals in evaluating the tax implications and benefits of implementing a bunching strategy, ultimately aiding in informed decision-making and financial planning.

Read more: How do charitable donations affect taxes?

Donation bunching FAQs

How many years can you bunch charitable contributions?

While there’s no strict limit on the number of years you can bunch charitable contributions, it’s advisable to evaluate your ability to maintain consistent giving levels and financial stability over the chosen timeframe.

What is a bunching deductible expense?

A bunching deductible expense refers to the aggregate amount of charitable contributions bundled together in a single tax year to exceed the standard deduction threshold and qualify for itemized deductions.

What is the cutoff date for charitable donations?

To qualify for a tax deduction in a given year, the postmark date for charitable contributions must be made by the end of that tax year, typically December 31st. However, certain contributions may have specific deadlines or requirements. A tax advisor is well-versed in year-end tax planning for business owners, individuals, and couples, and should be consulted in such matters.

Learn more about year-end tax planning for business owners for Avidian’s president and partner, Michael Smith, and Avidian’s director of financial planning, Robert Palmer, on our YouTube channel!

Contact Avidian Wealth Solutions for help with bunching your charitable donations

Bunching charitable donations offers a strategic approach to maximizing tax benefits while supporting philanthropic endeavors. By leveraging donor-advised funds and thoughtful planning, donors can amplify their impact and align their giving with their broader financial objectives. As with any financial strategy, careful consideration of individual circumstances and consultation with professional advisors are paramount to achieving optimal outcomes.

At Avidian Wealth Solutions, our team of financial advisors can work with you to maximize your tax savings. Our firm works out of a boutique family office-style environment that allows us to focus on the financial needs and goals of each client whether they’re directly related to charitable giving or a combination of different wealth solutions.

Schedule a conversation with one of our tax advisors in Houston, Austin, Sugar Land, or The Woodlands today to see how we can help you get the most benefits from your charitable giving.

More Helpful Articles by Avidian: 

• Understanding Capital Gains Tax in Texas
• What is UPMIFA? The Uniform Prudent Management of Institutional Funds explained.
• What to Know About Creating a Foundation for Charity
• What Are The Benefits of Thinking About Retirement Expenses Now?
• 6 Tax Write-Offs For Small Businesses You Should Know

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