Now is a great time to think about tax savings…and if you’re charitably inclined…you’ll want to consider the benefits of “bunching” your donations. Here’s what you should know about this valuable tax strategy.

What is a donor advised fund (DAF)?

When talking about bunching donations, it’s important to familiarize yourself with DAFs and how they work. Check out our blog, What are the Tax Benefits of Donor Advised Funds?

Essentially, a DAF, also known as a charitable gift fund or philanthropic fund allows the donor to make a tax-deductible contribution to the fund and then recommend grants from the fund to a specific public charity. This is great for year-end tax planning if you’re not yet sure which charities you would like to support but want to get the tax deduction before year end.

What is bunching?

Under this strategy, you contribute in year one what you would have contributed over the next three or four years. This can provide a better bang for your buck and ensure you don’t lose some of the benefit of your charitable tax deduction because you fall under the standard deduction.

For example, if you normally contribute annually, you could accelerate 2023 contributions into December 2022 to ensure you exceed the standard deduction threshold for this year. You’ll then be able to itemize and claim the full amount as a charitable deduction.

Picture this:

Let’s say you are a married taxpayer in 2022 with a standard deduction of $25,900, and your only itemized deductions are:

• State and local taxes of $10,000 (maximum allowable deduction for SALT),
• Mortgage interest of $5,000 and
• $10,000 of donations to your donor advised fund.

$10,000 + $5,000 + $10,000 = $25,000, which is less than your standard deduction, so your charity, although admirable, is not tax deductible.

Now let’s say you bunch three years of charitable donations to your donor advised fund into 2022, for a total of $30,000; $10,000 + $5,000 + $30,000 = $45,000, which is greater than the standard deduction.

In 2023 and 2024, you make your charitable grants from the donor advised fund and no charitable donations personally, so you take the standard deduction ($10,000 + $5,000 = $15,000, which is less than the standard deduction of $25,900).

Had you made the $10,000 of donations annually over the three years, your total deduction from adjusted gross income would be $77,700 ($25,900 * 3).

By bunching the charity into one year, your total deduction from adjusted gross income over that same three-year period would be $96,800 ($45,000 + $25,900 + $25,900).

Questions? Interested in bunching your donations? We can help.