The Art of Charitable Bunching
Charitable giving is a powerful way to support causes we are passionate about. For most people who give, they do so regularly either on a monthly or annual basis to organizations using cash donations. While these regular donations are a building block to charitable giving, a lesser-known strategy, charitable bunching, can magnify the impact of your contributions. In this article, we will delve into what charitable bunching is, the advantages it offers, essential considerations when implementing it, and who should consider this approach.
What is Charitable Bunching
Charitable bunching, also known as charitable lumping, is a concept that involves consolidating multiple smaller donations into a single, larger contribution. The primary advantage of charitable bunching comes from the higher overall potential tax deductions that you receive making a larger single donation. Overall, you will still be giving the same amount each year to your desired charitable organization. Charitable Bunching merely changes the timing of those donations.
Let me give you an example.
Assume a moderate-income family in the 22% tax bracket gives $15,000 per year to a charitable organization. Additionally, they have $10,000 per year in other itemized deductions. With the Tax Cuts and Jobs Act, the standard deduction was effectively doubled so their standard deduction in 2023 is $27,700. On their tax return, they are able to deduct from their income the higher of their combined itemized deductions ($25,000) or their standard deduction ($27,700). All else equal, this means that they will always claim the standard deduction and won’t gain any additional tax benefits from their charitable donations.
Over the course of 6 years, the couple would have received $166,200 in deductions but almost those came almost entirely from the standard deduction.
A different way... Charitable Bunching
Instead, the couple decides to implement charitable bunching. In 2023, they donate $45,000 instead of $15,000 which represents what they were intending to give in 2023, 2024, and 2025. Because they donated the full $45,000, they pushed their total itemized deductions in 2023 to $55,000 which pushes well over the standard deduction amount giving them a higher tax break in 2023. In 2024 and 2025, the couple does not give to their intended charitable organization but they are still able to take the standard deduction as they would have when they were giving annually.
Over the course of 6 years, the couple was now able to deduct $220,800 from their income resulting in tax savings of over $12,000 during that 6 year period!
Charitable Bunching Implementation
As the example above shows, charitable bunching can be a powerful way to lower taxes while continuing to make meaningful donations to your desired charitable organization. However, there are some considerations when to keep in mind when implementing this strategy:
- Ability to Contribute a Lump Sum: First and foremost, you have to be in a position where you can contribute a larger than normal charitable donation to start the strategy. If you are just funding donations through cash flow and do not have an amount you can donate from, you’ll have to work to build up your giving fund so you can implement this.
- Substantial Charitable Donations: To be effective, you have to give enough to overcome the standard deduction hurdle. If you give $200 per month, it would take over 10 years’ worth of bunched donations to get over the standard deduction. In contrast, if your donations are $1,000 per month, you would only need to bunch together 3 years to receive greater deductions.
- Annual Funding vs Lump Sum Funding for the Charity: If you have been giving a substantial amount regularly but then switch to a bunching strategy, this could be difficult for the charitable organization to adapt to particularly they are a smaller organization and you have not communicated your intents. If they expect $15,000 to show up in later years in addition to the lump sum, they may overcommit themselves in the off years. This concern can be addressed by utilizing a vehicle like the Donor Advised Fund (DAF) to hold the bunched donation allowing you to distribute it annually. See this article for more details on Donor Advised Funds: Charitable Giving through a Donor Advised Fund – Gilbert Wealth
- On Years and Off Years: When you utilize the charitable bunching strategy, you make multiple years of donations in a single year. So, what do you do in the subsequent “off” years when you aren’t giving? Answer – Saving up for the next charitable bunching amount. It may feel strange, particularly as a regular giver, to not be regularly giving to an organization. But keep in mind, you have donated to charity but just all upfront.
- Tax Law Changes: Future tax law changes may reduce the benefit of this strategy.
Funding the Bunching Periods
- Good-Old Fashioned Saving More: If you have taken care of other financial fundamentals like an emergency fund, paying down high interest debt, saving adequately for retirement, and protecting your family and income and you still have cash left over at the end of the month, you could save this money to begin a charitable bunching fund.
- Bonuses: Receiving a large bonus can be a great way to begin charitable bunching. Not only does charitable bunching help offset that higher income from the bonus, it allows you to jump right into the strategy and begin receiving the benefits right away.
- Sale of an Asset: If you sell an asset, you could use the proceeds to fund a bunching strategy.
- Appreciated Securities: Donating appreciated investments like stocks or stock funds can be a great way to start this fund while receiving some added tax advantages by avoiding capital gains on the investment. In fact, if you have taxable investments (non-IRA or 401k accounts), you can implement what I call the “Give-Gain-Harvest” Strategy which is a system of implementing charitable bunching using an investment portfolio and regular investing.
Summary
Charitable bunching isn’t for everyone but can be a powerful addition to a financial plan in the right circumstances. By taking advantage of timing your donations through bunching, you can reduce your tax burden over time giving your greater resources to give more or live more.
Charitable Bunching is just one tool in a charitable gift planners toolbelt to help you maximize your giving. Check out my comprehensive article on charitable giving strategies for other ideas: The Comprehensive Guide to Charitable Strategies – Gilbert Wealth