From the Blog

Can You Save a Bunch with Bunching?

Posted on August 20, 2019

Aggregating charitable gifts could allow you to give during your lifetime and save money at tax time.

Picture this. You’re married, filing jointly in the top 35% tax bracket. You typically give $8,000 a year to your favorite charity, enjoying the do-gooder feeling and the tax deduction when you itemized. Your charitable donation combined with your state and local tax deduction ($10,000, the cap for this deduction) and mortgage interest deduction ($7,000) comes to $25,000. But the 2017 Tax Cuts and Jobs Act doubled the standardized deduction to $24,000 ($12,000 for single filers). You’re saving $350 a year in taxes on the $1,000 above the standard deduction. Nice, but itemizing may not be quite as fruitful now as it has been in the past.

On the other hand, a strategy called bunching could give you a significant leg up. If you are able to, bunching three (or more) years of charitable giving into one year – say, $24,000 total in our example – allows you to itemize the full $17,000 over the standard deduction. That’s a potential tax savings of $5,950, in this case. See the illustration below for a breakdown of the math.

If you don’t have access to that much liquidity to take advantage of bunching, you still have options. You can, of course, slowly and steadily put aside cash each month to accumulate a larger contribution. You can also fund gifts with appreciated securities to avoid capital gains taxes. A contribution of appreciated securities owned for more than one year is deductible at market value in an amount up to 30% of adjusted gross income.

Bunching contributions in a DAF

Another option is bunching charitable contributions into your donor advised fund (DAF). In one year, you can consolidate your contribution to the DAF, itemize that gift and then use the DAF to support favored causes over a number of years. Basically, you can donate what you would give in the next three to five years today into a DAF, and then take your time deciding how to distribute it over the years to come.

Even better, if you’re not entirely sure who you want to benefit from your generosity or in what amounts, a DAF gives you some wiggle room to make those decisions – while allowing your money an opportunity to grow.

Potential icing on the cake? Bunching through your DAF using appreciated securities to fund the donation. In addition to the benefits offered through your DAF, you’ll get the deduction for full market value and avoid paying capital gains taxes on investments held over a year, yielding a bigger tax benefit overall. And, if you are donating to a tax-exempt organization, it won’t pay capital gains taxes either.

It pays to strategize

Bunching isn’t new, but it has perhaps become more relevant given the new, higher deduction built into the tax law, which also eliminated the personal exemption. In addition, the Pease limitations have been repealed, no longer reducing the itemized deductions of higher-income earners who give to charity. Many saw the changes in the tax law as a hindrance to philanthropic endeavors, but if taxpayers strategize with their financial professionals, the changes could be seen as encouraging charitable giving.

As with many tax-saving techniques, it pays to discuss ideas with your financial advisor and accountant first. They can help you determine what strategy will work best given your personal circumstances.

Raymond James does not provide tax services. Please discuss these matters with the appropriate professional.