With today’s high standard deduction, fewer taxpayers are getting a tax benefit from their charitable gifts. If you’re such a taxpayer, “bunching” may be right for you.
Case Study: Maximizing Tax Savings with Charitable Donation “Bunching”
Marco and Sara, a married couple, regularly donate $10,000 to charity each year. However, changes brought about by the Tax Cuts and Jobs Act (TCJA) significantly reduced the tax benefits of their charitable giving.
The Problem
When filing their 2019 tax return, Marco and Sara realized that their $10,000 in charitable donations provided no tax savings. Here’s why:
The TCJA nearly doubled the standard deduction, making it harder for taxpayers to benefit from itemizing deductions.
For 2020, their total itemized deductions (excluding charitable donations) were $12,000. Adding $10,000 in charitable donations brought their total to $22,000—still less than the 2020 standard deduction of $24,800 for married couples filing jointly.
As a result, they opted to take the standard deduction, receiving no additional tax benefit from their charitable giving.
The Solution: “Bunching” Charitable Donations
To address the issue, Marco and Sara consulted a tax advisor who suggested “bunching” their donations into alternating years. This strategy involves consolidating two years’ worth of donations into a single year, allowing them to itemize deductions in that year while taking the standard deduction in the alternate year.
How It Worked
2020
Marco and Sara did not make their usual $10,000 donation in December 2020. Instead, they claimed the standard deduction of $24,800 on their 2020 tax return.
2021
In January 2021, they donated $10,000, followed by another $10,000 in December 2021, for a total of $20,000 in charitable contributions.
Combined with $12,000 in other itemized deductions, they claimed $32,000 in itemized deductions on their 2021 return.
2022
They paused large donations for the year, opting to take the standard deduction of $25,900 for 2022. However, under a COVID-19 relief law, they made $600 in cash donations and deducted that amount while still claiming the standard deduction.
2023
Marco and Sara resumed “bunching,” donating $10,000 in January and another $10,000 in December for a total of $20,000 in charitable contributions.
With $12,000 in other itemized deductions, they claimed $32,000 in itemized deductions on their 2023 return.
2024
They paused donations again, taking the standard deduction of $29,200 for 2024.
Future Considerations
Marco and Sara’s charitable giving strategy for 2025 depends on two factors:
Whether the high standard deduction (set to expire after 2025) is extended.
Other potential tax law changes that could impact the tax benefits of their donations.
By leveraging “bunching,” Marco and Sara ensured they could continue to support their preferred charities while maximizing their tax savings. This strategy highlights the importance of proactive tax planning in light of changing laws.