Bob and Susan Smith are generous Christians. They give $15,000 every year to their local church. When they file their taxes every year, they’ve traditionally experienced specific tax savings by itemizing their deductions, including deductions for their charitable contributions and state and local taxes. Bob and Susan have no mortgage, so they don’t have any interest expense, but their state and local taxes average $8,000 per year.
However, recent changes to the tax laws significantly increased the standard deduction, eliminating the specific tax savings they’ve enjoyed through their generosity and other eligible tax deductions. Though they intend to continue their generosity, the tax code no longer incentivizes them to give in the manner they previously had.
How can Bob and Susan continue to be generous and maximize the tax advantages of their charitable contributions? By “bunching” their charitable giving.
What is bunching?
The Tax Cuts and Jobs Act of 2017 has introduced many Americans to the concept of bunching. Recent changes to the tax code increased the standard deduction to $24,000 for married couples filing jointly. As a result, many couples will likely not have enough itemized deductions in any given year that exceed the standard deduction. However, by combining two years worth of giving into one, and with their itemized state and local tax deduction for that year, couples are able to leverage the power of itemized deductions.
Bunching is a strategy of combining the charitable contributions of two years into one. For example, Bob and Susan would give $30,000 in 2019 but give $0 in 2020. In the giving community, bunching means doubling up on donations in one year and skipping donations all together the next.
The bunching strategy is used every other year. In the bunching year, donors give two years worth of charitable donations, itemize their deductions, and beat the standard deduction. In the years in between bunching, donors skip giving and take the standard deduction.
Bunching enables generous donors to overcome the standard deduction amount every other year. If you give away $15,000 per year, your itemized deductions may not exceed the standard deduction threshold ($24,000 for married couples filing jointly). However, if you bunch your gifts and give $30,000 away every other year, you can itemize your deductions and exceed the standard deduction threshold.
Using a bunching strategy enables Bob and Susan to support the ministries important to them while leveraging the power of itemized deductions every other year, and also take advantage of the new higher standard deduction.
How can you bunch responsibly?
Bunching does present a practical problem for donors and charitable organizations. If Bob and Susan Smith give $30,000 in 2019 to their local church, their local church may expect this same level of giving on an annual basis and set their budget around it. However, if Bob and Susan donate the $30,000 every other year to their PCA Foundation Advise & Consult Fund® (a donor-advised fund), they can take a deduction for the $30,000 in the year of their donation. They can then pace their giving in increments over a two-year period from their Advise & Consult Fund® to their church as they would have normally. Bunching your charitable giving through a donor-advised fund saves you time and gives you peace of mind knowing your funds are actively and responsibly given.
What do church leaders need to know?
Church leaders need to be aware that some members may be doubling up on their giving this year or in future years. As a result, church leaders need to inform their members of the advantages of bunching while also encouraging them to use a tool like the PCA Foundation’s Advise & Consult Fund to pace their giving to their church. Though churches should never budget presumptuously, the tax code revision introduces an extra measure of cautiousness.