The Charitable Tax Strategy That Can Potentially Save You Thousands of Dollars (and Year-end is the Best Time to Do It)

December 17, 2020
Strategic philanthropy

Ever since the The Tax Cuts and Jobs Act (TCJA) in 2018, it’s been tougher for many people to see any positive tax effect from charitable giving. Unless the total of all personal deductions (charitable giving, mortgage interest, property taxes, and all others) is higher than the standard deduction, a donor won’t see any tax impact from their charitable giving. They’ll simply use the standard deduction instead of itemizing.

In 2020, for single filers the standard deduction is $12,400, and for married couples filing jointly it’s $24,800.

That means for most middle and upper-middle income donors, a really significant commitment to giving would be needed to impact their taxes, even if they are homeowners.

Here’s an example: A married couple—let’s call them “the Smiths”—gives $10k per year to charity and has mortgage interest and property taxes of $12k in the tax year. They would take the standard deduction of ~$25k because it’s greater than their itemized deduction of $22k ($10k + $12k). They don’t see any incremental tax impact from their charitable contributions.

But! In this example, the Smiths have an opportunity to save a lot of money on their taxes via their charitable giving even though they don’t clear the standard deduction.

It’s called the “bunching” strategy.

The bunching strategy is when you move multiple years’ worth of charitable giving in one single tax year, and then give nothing the following year(s). It allows you to itemize way beyond the standard deduction in the year you bunch all your giving, and take the standard deduction in the “off-years.” 

Your total deductions over that multi-year period can be thousands of dollars higher, potentially saving you thousands.

As a concrete plan, over 2020-2021, you’d want to go ahead and give all that you would plan to give to charity in 2021 in December 2020 to “bunch” your giving in 2020. Then, you’d give nothing in 2021 and take the standard deduction. You can also bunch other deductions like pre-pay taxes or personal business expenses in 2020 in addition to bunching your giving.

Let’s look at how this plays out for our above-married couple, the Smiths.

Instead of giving $10k per year over two years, the Smiths could give $20k in year 1, and $0 in year 2. Let’s see what happens to their tax impact.

Since they gave $20k, and they have $12k in mortgage interest and property taxes, they itemize in year 1 with total deductions of $32k. Then, in year 2, they take the standard deduction of ~$25k.

Over the two-year period, by bunching, their total deductions are ~$57k instead of ~$50k. At a ~20% effective federal income tax rate, that extra ~$7k is worth ~$1400 in savings. Awesome!

Here’s an image to illustrate the Smith’s situation if they bunched in 2020.

Now, you may think, “it’d be tough to just forsake giving to charity for a year.” I agree! That’s where a donor-advised fund (DAF) comes in like Charityvest.

If the Smiths put their bunched $20k of giving into Charityvest in year 1, then they can grant it out slowly from their Charityvest fund to their charities over the two-year period. Their favorite charities never see a change in their support.

A lot of people are starting to bunch, and the savings are significant. The more significant your giving or mortgage/property tax obligations, the larger the bunching effect can be.

For example, if the Smiths gave more, say $20k per year, bunching would increase their tax savings to ~$2,600.

You may be thinking, “Well, I don’t own a big home or give a lot to charity. This is well and good for folks who can, but I’m not there.” You can actually bunch across as many as 3 or 4 tax years if cash flow allows. The effect is even stronger.

It’s a great strategy that can save many households thousands for a guaranteed return on capital.

We recommend consulting a financial advisor or tax professional, but please feel free to reach out if we can answer any questions about how this might work for your situation.

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Stephen Kump

Stephen is the chief of promoting generosity @ Charityvest. Former Bain consultant, philanthropic advisor, and military officer. Yale MBA.

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