April 24, 2024

The Benefits of Bunching

Helping Your Clients Maximize the Tax Benefit of Their Giving

The Tax Cuts and Jobs Act of 2017 (TCJA) fundamentally changed the conversations many advisors had with their clients around tax-effective giving. By doubling the standard deduction and limiting the available deduction for state and local taxes, the TCJA made it less attractive for many taxpayers to itemize their deductions. While taxpayers making large annual gifts still benefited from itemizing their deductions, those making more modest annual gifts sacrificed the benefits they had previously received from their charitable giving for a higher standard deduction.

Since passage of the TCJA, donors and their advisors have looked for ways to use the increased standard deduction while still receiving a tax benefit for their giving. One of the most popular techniques for doing this, “bunching,” involves a donor strategically timing their contributions by consolidating them into specific years. This month’s blog post explains how bunching works and provides tips for exploring and implementing bunching strategies with your clients.

What Is Bunching?

Bunching involves consolidating several years’ worth of charitable contributions into a single tax year. Instead of donating annually, individuals make larger contributions in specific years with the goal of receiving an itemized deduction that is greater than the standard deduction. In non-bunching years, they may forego making charitable donations or make minimal contributions, opting to use the standard deduction instead.

Consider this example: John and Jane Taxpayer are a 35-year-old married couple who file jointly. They have historically given $8,000 per year to charity and would like to continue doing so. They have asked you what impact, if any, bunching will have on their ability to receive a tax benefit for these gifts.

As shown in the chart below, by bunching their annual gifts, John and Jane would receive an additional $3,800 in tax benefits for their charitable giving.

*Assumes the 2024 standard deduction does not change in 2025, and no changes are made affecting the availability of itemized deductions. 

Tips for Exploring and Implementing a Bunching Strategy

If you have clients who may be good candidates for bunching, here are some tips for exploring and implementing a bunching strategy with them:

• Evaluate your client's financial situation to determine their ability to make larger contributions in certain years.
• Work with your client to create a multi-year giving plan that identifies the years for bunching contributions. This plan should align with their financial goals, tax situation and charitable objectives.
• Explore various charitable giving vehicles, such as donor-advised funds, donor designated funds, and field of interest funds. Bunching giving into donor advised funds can still allow donors to recommend annual distributions to their favorite nonprofits. (You can find out more about fund options at MCF in last month’s Advisor Blog post.)
• Coordinate the timing of contributions to ensure they fall within the desired tax year. (Clients should be aware of IRS deadlines for charitable donations to claim deductions in the intended year.)
• Maintain thorough records of all charitable donations, including receipts and acknowledgment letters from the receiving organizations, to substantiate deductions during tax filing.

If you have any questions about what types of funds may be a good fit for your client’s charitable giving, MCF is happy to help! Alison Helland, Director of Donor and Advisor Engagement, will be happy to assist you or refer you to another member of our Donor Engagement team who can serve as a resource for your specific situation. You can reach Alison via e-mail at ahelland@madisongives.org or via phone at (608) 446-5937.