Maximizing Tax Benefits by “Bunching” Charitable Contributions
The Tax Cuts and Jobs Act (TCJA) became law in December 2017. Most of the law’s changes were implemented in 2018 and are scheduled to sunset after 2025. Under the TCJA, the standard deduction nearly doubled in size. Now, for 2022 taxes, single filers may claim a $12,950 standard deduction, while married couples filing jointly can claim a $25,900 standard deduction.
Because of this substantial increase in the standard deduction, many taxpayers who historically itemized deductions may find it advantageous to take the standard deduction in the future. Those who are charitably inclined and find themselves on the margin between taking the standard deduction or itemizing could maximize their tax benefits by bunching two years of charitable contributions into one year, itemizing deductions for that year, and taking the standard deduction the other year. A donor-advised fund account enables them to easily execute this strategy while continuing their annual support of the causes and charities of their choice.
Case Study
How exactly does this bunching strategy work? Let’s say a married couple annually has $23,000 of itemized deductions, including $10,000 in donations to a donor-advised fund or other public charity. Because that amount is below the $25,100 standard deduction in 2021 and $25,900 standard deduction in 2022, they could take the standard deduction each year, and over two years they would claim a total of $51,000 in standard deductions. This is shown in Option 1.
However, the couple instead takes a more tax-smart approach, as shown in Option 2. Rather than donating $10,000 to charity each year, the couple concentrates or bunches two years of charitable contributions into a single year. The bunched giving creates a total of $33,000 in itemized deductions in 2021, and they take the $25,900 standard deduction in 2022. With this option, the couple has $7,900 of additional tax deductions over the two years. In addition, if these contributions were made to a donor-advised fund account, the couple could recommend grants to charity in both of the years.
* The standard deduction amounts for different filing statuses may vary annually.
A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation. Consult your tax advisor for more information.
Bunch deductions
Bunching your deductions can maximize the value you get out of them, especially in categories where you have to cross a minimum threshold. For example,
- If you have medical expenses every year that equal 7% of your AGI, you’ll never get to itemize those deductions.
- But, if you can push any of those regular expenses into the following year, you may have more than 10% of your AGI in expenses in one year, instead of 7%.
- In this scenario, a portion of those expenses may become deductible.
Spend when itemizing
If you intend to itemize in any given year, it makes sense to generate as much spending as possible in deductible categories to get the maximum effect. While spending just to generate a deduction isn’t advisable, if you’ve been holding off on certain purchases, it makes more sense to make those purchases during a year in which you itemize.
For example, if you have been delaying certain medical treatments, you’ll get more mileage out of your deductions if you spend that money in a year when you’re already over the medical deduction threshold.
Follow a checklist
If you take certain deductions every year, you might get in the habit of overlooking other available options. Keeping a checklist of available deductions can help you unearth both one-time and everyday expenses that you can actually deduct. For example,
- If you have gambling losses, you can deduct those up to the extent of your gambling winnings.
- You might regularly take deductions for charitable contributions, but you may also be able to deduct your mileage and expenses for travel to and from a charity.