In 2017, the Tax Cuts and Jobs Act (TCJA) dramatically increased the standard deduction, decreasing the amount of people who claim a deduction for their charitable contributions. With provisions of the TCJA set to expire at the end of 2025, and as we wait to see what new legislation will be passed, you might want to consider a charitable strategy called “bunching,” which has increased in popularity as a result of this act.
With a bunching strategy, a giver combines two or more years of charitable giving into a single year in order to exceed the standard deductions thresholds for that year, save taxes by itemizing, and have more to give to the charities they love.
To itemize or not to itemize
In 2024, the standard deduction is up to $29,200 for a married couple filing jointly, $21,900 for head of household, and $14,600 for individuals. So, in order to receive a tax benefit from your charitable contributions, your total itemized deductions – state income taxes, real estate taxes, mortgage interest, charitable contributions, etc. – must exceed these standard-deduction thresholds.
Exceeding these thresholds has become more challenging for many taxpayers due to other restrictions placed on state and local taxes and mortgage interest imposed under the TCJA. For example, state and local taxes are now capped at a maximum allowable deduction of $10,000. In other words, if your state income taxes and real estate taxes combined are $18,000, you’ll lose any tax savings on the $8,000 that exceeds the $10,000 cap.
The amount of mortgage interest that can be deducted has also been limited to a loan amount of $750,000, and interest on home equity loans is no longer deductible unless the money is specifically used to acquire, construct, or improve your home. The higher standard deductions – combined with these restrictions and limitations on state and local taxes and mortgage interest – have resulted in a dramatic decline in the number of taxpayers who itemize their deductions. It’s estimated that 90 percent of all taxpayers now opt for the standard deduction.
In light of this, generous taxpayers who may not typically itemize their deductions on an annual basis should consider a bunching strategy.
What is “bunching”?
A bunching strategy helps by capturing charitable deduction benefits every few years. Some taxpayers may benefit from bunching two or three years of charitable contributions into a single year in an effort to exceed the standard deduction threshold for that year, and then taking the standard deduction in subsequent years. For example, consider the following couple who file a joint tax return.
Joe and Mary incurred state income taxes of $14,000, real estate taxes of $8,000, mortgage interest of $4,000, and made charitable contributions totaling $10,000. Their combined state income and real estate taxes are capped at $10,000 under the new law. Therefore, Joe and Mary can claim total itemized deductions as follows:
- $10,000 state and local taxes
- $4,000 mortgage interest
- $10,000 charitable contributions
- $24,000 total itemized deductions
Because Joe and Mary’s standard deduction of $29,200 exceeds their allowable itemized deductions of $24,000, they will pay less tax by simply claiming the standard deduction. Assuming their marginal income tax rate is 32 percent, the additional $5,200 of deduction provided by the standard deduction saves them $1,664 in taxes.
However, let’s assume Joe and Mary have the capacity to accelerate two years of giving into the current year, providing a charitable contribution deduction of $20,000 instead of $10,000. The total itemized deductions they can now claim are:
- $10,000 state and local taxes
- $4,000 mortgage interest
- $20,000 charitable contributions
- $34,000 total itemized deductions
Joe and Mary’s itemized deductions now exceed their $29,200 standard deduction by $4,800 producing tax savings of $1,536 at their 32 percent marginal rate. In the subsequent tax year, they would claim the standard deduction, and then bunch their deductions the following year and again claim their itemized deductions.
If Joe and Mary were able to bunch three years of giving into a single year, they could increase their total itemized deductions further to $44,000 and capture additional tax savings of $4,736 over the standard deduction benefit. If they make those gifts to a charity like NCF that sponsors donor-advised funds, they can us their Giving Fund to support the charities they love over the next three years or accelerate their giving to their favorite charities earlier than they otherwise might have.
Tax-wise planning so you can give more
While the primary motivations for charitable giving have not changed, the tax implications of giving have shifted over the years for many taxpayers. However, with wisdom, you can continue to maximize your charitable giving through strategic charitable planning. If you’re not expecting to itemize your deductions annually but are interested in exploring how you might be able to give more using this strategy, we’d be glad to help.
Contact your local NCF team to learn more about a bunching strategy.
