The Tax Cut and Jobs Act (TCJA) introduced some significant changes to the rules concerning itemized deductions. In fact, many of the deductions on Schedule A — the itemized deductions — were repealed or modified in a way that limits their use.
Couple this with the (almost) doubling of the standard deduction and it’s not surprising that many taxpayers are simply taking the standard deduction.
With fewer taxpayers itemizing, certain deductible expenses — in particular, charitable contributions — are no longer providing any federal tax benefit.
Rather than giving up on charitable giving, taxpayers can use a strategy known as “bunching” to maintain some tax benefit for those gifts.
Bunching essentially means lumping multiple years’ worth of charitable contributions in a single year in order to take an itemized deduction in year one and the standard deduction in the following years.
How bunching produces Tax benefits
To help illustrate the tax benefit of bunching charitable gifts let’s look at an example assuming:
- A couple is married filing jointly, ages 60 & 58
- Total income reported from various sources is $160,000
- Line 7 of Schedule A (State and Local taxes) usually totals around $10,500
- Line 10 of Schedule A (home mortgage interest) is zero, they have no mortgage
- Line 14 of Schedule A (gifts to charity) is $10,000 per year
- Taxable income in 2019 is 135,600 (assuming they use the standard deduction of $24,400)
- Federal tax liability in 2019 is $19,764 based on the IRS tax chart
- This couple will be taking the standard deduction rather than itemizing, meaning the $10,000 annual gift to charity is no longer tax-deductible
- These underlying numbers will remain unchanged for each of the years
Running a series of multi-year tax projections produces the following tax outcomes.
| Scenario | 2019 Fed Taxes | 2020 Fed Taxes | 2021 Fed Taxes | 3-Year Tax Savings |
| No lumping, continue gifting $10,000 each year from cash | $19,764 | $19,764 | $19,764 | |
| Lump sum gift of $30,000 in 2021, standard deduction in 2019 and 2020 | $19,764 | $19,764 | $16,288 | $3,476 |
In this case, lumping charitable contributions provides a total tax savings of $3,476 over three years, with the potential for additional tax savings through capital gains avoidance if appreciated stock is gifted.
bunching QUick guide
How do you know if the strategy makes sense? Hopefully, this decision tree will help you determine if you can benefit from bunching your charitable gifts.
Keep in mind that other tax strategies — like qualified charitable distributions and Roth conversions — can also be deployed when bunching charitable gifts that can produce additional tax savings!
Ultimately, if it looks like you would benefit from bunching your deductions, I suggest discussing it with your tax advisor. They’ll be able to help you navigate the timing of the gifts and the optimal amount, as well as the other strategies that are applicable to you.