As the year winds down, many people think about charitable giving and how gifts fit into their overall financial plan. One strategy is “bunching” your charitable donations. It’s an intentional way to support the causes you care about and maximize your tax benefits. How does it work exactly, and does it make sense for you?

What Is Bunching?

Bunching is a tax strategy where you combine multiple years’ worth of charitable contributions into one tax year rather than spreading them out over multiple tax years. After the Tax Cuts and Jobs Act in 2017 significantly increased the standard deduction, fewer taxpayers have been able to itemize their deductions. Let’s say you add up all your itemized deductions, including your charitable contributions, and the total falls just below the standard deduction. If you give about that same amount each year, you may never realize a tax benefit because you’d never itemize your deductions. In that case, bunching can help you get over that threshold, allowing you to itemize in one year for a larger tax benefit, then take the standard deduction the next year.

How Bunching Works

• Identify how close your itemized deductions are to your standard deduction.
• If you’re close, consider making two or more years’ worth of charitable donations at once.
• In that tax year, your higher charitable giving—combined with your other deductions—may push you above the standard deduction, meaning you can itemize and receive a larger tax benefit.
• In the alternate year(s), you could pause your gifting and simply take the standard deduction.

This allows you to still give to your favorite organizations; you’re just being strategic about when you set aside funds for giving.

A Popular Giving Tool: Donor-Advised Funds (DAFs)

Many clients use a Donor-Advised Fund to bunch donations. With a DAF you make a large, tax-deductible contribution to the account in your “bunching year,” and then grant the money to charities over time—monthly, annually, or whenever it fits your giving rhythm. For example, if you open a DAF and fund it with $10,000 in the current tax year, it counts as a charitable contribution in that same tax year, but you could choose to dole out $1,000 to each of your five favorite charities for the following two years. DAF accounts can have contributions invested, giving them the opportunity to grow over time and for you to potentially grant more money to charity than you initially contributed!

Another benefit of a DAF is the ability to fund it with appreciated assets, which can be a great way to reach your charitable giving goals while also avoiding potential capital gains tax if you were to sell the appreciated assets. Let’s say you bought $1,000 worth of Apple stock 20 years ago. That $1,000 is now worth over $150,000 as of this writing! Selling any of those shares would incur sizable capital gains. However, if you contributed the appreciated shares to your DAF instead of selling them and donating the cash, you would avoid realizing any capital gain and potentially improve your tax situation while your charity(ies) of choice benefit from your stellar stock pick all those years ago. This strategy also works with other assets like mutual funds and ETFs.

How Bunching Relates to Qualified Charitable Distributions (QCDs)

If you’re age 70½ or older you can give to charity directly from your IRA using a provision called the Qualified Charitable Distribution (QCD). QCDs allow you to donate (up to a certain annual limit) directly from your IRA to a qualified charity, and the amount donated is excluded from your taxable income.

Since QCDs are excluded from income, they cannot be claimed as itemized deductions—so “bunching” doesn’t apply to them. So, if you’re eligible for QCDs, they are often your most tax-efficient way to give. Bunching can complement QCDs—but is typically utilized when someone has highly appreciated assets or for donors who are not yet 70½.

Is Bunching Right for You? Questions to Consider

It can be tough to determine if the bunching strategy is best for your situation. Alongside your financial planner and tax advisor, ask yourself the following questions:

• Do your typical annual itemized deductions fall near the standard deduction?
• Are you already planning to give charitably over the next few years?
• Do you have a year with unusually high income where an increased tax deduction would be especially helpful?
• Would you prefer to get a deduction now and decide who to give to later?
• Do you have the cash flow or appreciated assets available to front-load multiple years of donations?

If you answered yes to several of the above questions, bunching may be a meaningful way to support the causes you care about while improving your tax outcome. Every client’s situation is unique, and your Planner can help you determine whether this approach fits your values and long-term goals.