Contribution Bunching

Posted on Wednesday, March 30, 2022

With recent changes to the tax law, fewer people are able to itemize deductions on their tax returns.  As a result, many who make annual charitable gifts no longer get a tax benefit from doing so.  One way to overcome this limitation is Instead of giving to charities every year, bunch the deductions into every other year.  This works best for those giving moderate amounts but who never have quite enough to get over the standard deduction. 

For instance, if you typically give your charity $10,000 each year, give $20,000 every other year instead.  The $10,000 gift may not be enough to allow you to itemize, but a $20,000 gift may put you over the threshold.  By changing the timing of your gifts in this way, you can maximize the tax benefit by itemizing in the year of the gift and using the standard deduction in the “off” years.   

If bunching two years of contributions doesn’t get you over the itemization threshold, you could use an every third year bunching strategy.  Or, you could consider using a vehicle called a donor advised fund. 

A donor advised fund is a 501(c)(3) charity that will accept your gift and then allow you to make gifts from the fund to your chosen charities.  This allows you to make a large deductible donation in one year while still controlling the timing of the gifts to your chosen organizations over multiple years.  For example, let’s say you normally give $15,000 in annual gifts to your church or other charity.  That may not be enough to allow you to itemize deductions.  If you instead give $45,000 in one year to the donor advised fund, you get to deduct the $45,000 in the year of contribution and then instruct the fund to give the money out in annual $15,000 installments on your behalf.  You’ve now created a deduction where none existed before. 

It’s pretty easy to find a donor advised fund.  Brokerages such as Schwab and Fidelity have them, and many Community Foundations have them also.  There are usually nominal fees involved, but the tax benefit makes it very worthwhile. 

As you can see, even with the latest tax law changes, it’s still possible to realize tax savings from your charitable giving.  Be sure to check with your tax advisor before implementing these ideas to make sure they are appropriate for you. 

Contributed By: Mark Westerhausen, CPA | Director | DWD CPAs & Advisors

Posted in Tax Topics For Individuals

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