Now more than ever, tax smart giving means bunching. And bunching usually means using donor-advised funds (DAFs).
Bunching first became popular in 2018 when the standard deduction doubled. The percentage of taxpayers who itemize dropped from 30 percent to just 10 percent. That meant 90 percent of taxpayers couldn’t use their charitable deductions. Unless. Unless they started bunching.
Suppose a person with a $15,000 standard deduction makes $10,000 in cash donations each year for four years. Without any other deductions, what is the tax benefit? Nothing. Each year it makes more sense to take the standard deduction rather than using the charitable deductions. These charitable deductions have no value. Unless. Unless they start bunching.
With bunching, they give $40,000 in year one and $0 in years two, three, and four. In year one they deduct $40,000. That’s $25,000 more than the $15,000 standard deduction. In years two, three, and four they take the standard deduction. The taxpayer gets an extra $25,000 in deductions just from bunching. That’s tax-smart charitable planning.
But most people don’t want to stop helping their favorite charities for three years. So, they use a DAF. The $40,000 gift goes to a DAF in year one. The DAF then pays $10,000 each year for four years to the selected charities. The charities receive the same amounts at the same times, but the donor gets a bigger tax benefit.
In the new tax law, this bunching strategy got even more attractive for many donors. Let’s look at the ways.
1. Second verse, same as the first
Just as in 2018, the standard deduction gets bigger. This time it’s increasing by another $1,000. As before, that pushes more people into non-itemizer status. For these folks, any charitable deductions above $1,000 per person will be lost. Unless. Unless they start bunching.
2. Bunching, now with even more flexibility
The new tax law allows for $1,000 charitable deductions for nonitemizers. This makes bunching more flexible. Previously, any cash gifting done in the off years (when taking the standard deduction) created no tax benefits. Now, up to $1,000 of the off-year gifting is still deducted. This provides a bit of flexibility while still maximizing deductions. This new option is a complement, not an alternative to bunching. (It’s not an alternative because $1,000 annual gifts aren’t large enough to warrant bunching. And any amounts above this are still lost without bunching.)
3. Bunching is better for itemizers
Bunching is not just a tax-smart way for nonitemizers to sometimes itemize. It’s also a tax-smart way for itemizers to sometimes take the standard deduction. Suppose a taxpayer faces a $15,000 standard deduction. They donate $20,000 in year one and in year two. This gives them $40,000 in total deductions. But if they bunched those gifts in year one, they get $40,000 in year one itemized deductions and another $15,000 in year two standard deduction. That’s $55,000 in deductions instead of $40,000 without bunching. The new tax law increases the year-two standard deduction by $1,000. That bump increases the deductions from bunching by another $1,000.
4. Avoid the new charitable floor
In the new tax law, itemizing taxpayers lose the charitable deductions from giving below the charitable floor of 0.5 percent of their income (AGI). For example, if a donor’s income is $100,000, the first $500 of their itemized charitable contributions are lost. This encourages bunching. If this itemizing donor gives $2,000 in year one and $2,000 in year two, they deduct $3,000 total ($2,000-$500 in each year). If instead they bunch $4,000 in year one and give $0 in year two, they deduct $3,500 ($4000-$500 in year one). Avoiding the year-two giving floor is a smarter way to give. This strategy also applies to giving from corporations. In the new tax law, they lose the charitable deductions from giving below the charitable floor of 1 percent of net income.
5. Bigger bunching is even smarter now
Too much bunching can sometimes reduce the benefit from deductions. This can happen if the deductions push the taxpayer into a lower tax bracket. The lower tax bracket makes additional deductions less valuable. For example, a taxpayer in the top tax bracket of 37 percent gets 37 cents back for each dollar of charitable giving. But, if their deductions lower their income into the 35 percent tax bracket, they get only 35 cents back for each additional dollar of giving. Sometimes it makes sense to bunch less and leave more deductions for a later year when the tax bracket will be higher.
Under the new tax law, this is less of a concern. Moving from the 37 percent tax bracket down to the 35 percent tax bracket now makes no difference. In either case, the charitable deduction benefit is capped at 35 percent. For example, for a single taxpayer in 2025, the drop in benefit used to happen when AGI fell below $626,350. (This is the bottom of the 37 percent bracket). Now it wouldn’t kick in until income fell below $250,525. (This is the bottom of the 35 percent bracket.) The 35 percent cap removes the tax-bracket penalty from bunching for this segment of taxpayers.
6. Touch the ceiling: The new secret benefit from big bunching
The new charitable floor eliminates itemized charitable deductions for gifts below 0.5 percent of AGI. Unless. Unless you bunch gifts so much that you touch one of the income-giving limitations. Do that and those deductions aren’t lost. They just carry over until next year.
Suppose a taxpayer holds substantial appreciated assets but reports only $100,000 AGI every year. They donate $25,000 in appreciated assets in year one and year two. Each year, they deduct $25,000 – the $500 charitable floor. This creates $49,000 in deductions. But suppose instead that they donate $30,001 in year one and $19,999 in year two. This creates $49,500 in deductions. They will deduct $29,500 in year one and $20,000 in year two. Why? Because the income limitation for gifts of appreciated assets is 30 percent. This means $1 of the first gift is carried over to year two. But because they reached this limit, the year one charitable floor is not lost. Instead, it carries over to year two. In year two, they deduct $19,999 + $1 carryover + $500 floor carryover – $500 floor (i.e., $20,000). As AGI and gift size increase, this benefit becomes more substantial.
7. Make big asset gifts in the target year and a small cash gift in off years
Bunching means giving big in the (itemizing) target year and not giving in the (usually non-itemizing) off years. Giving appreciated asset gifts is smarter than giving cash because it creates a double tax benefit. The taxpayer gets a deduction for the full value of the asset (if held for more than a year) but pays no capital gain tax on the appreciation. Donors can even wipe out the capital gain from a portfolio by donating old shares of stock and immediately buying new shares of the same stock. This “charitable swap” costs the same as giving cash, but it removes capital gain without changing the portfolio.
Asset giving is also the smartest way to bunch gifts. The new tax law increases the flexibility of this strategy. It now allows for small cash giving in the off years – deductible up to $1,000 per person. Also, the income giving limits for cash are 60 percent but for appreciated assets gifts they are 30 percent (or 20 percent if given to a private foundation). That makes it easier to “touch the ceiling” with appreciated asset gifts and avoid the charitable floor penalty.
The new tax law changed things in charitable giving. Mostly, it made things more complicated. This complexity rewards donors who precisely navigate the new floors, ceilings, and alternative deductions. This new reality means that maximizing charitable tax benefits requires higher flexibility. It often requires giving bigger but less frequently. In other words, it requires bunching. For donors who still want a consistent annual impact at their favorite charities, DAFs will be the favorite tool.
Giving bigger but less frequently can also impact fundraising. Large one-time gifts to fund a big project can create more tax benefits than consistent regular donations of the same size. For donors without DAFs, a big one-time ask can be tax smart. For donors with DAFs, such asks are more feasible because of accumulation inside the DAF. In fundraising, focusing on major life-investment gifts – even with their longer donor cultivation timelines – has always been more effective. In financial planning, the new law can also make these big gifts more tax efficient.
