Recently, I passed the examination and completed all requirements of the Certified Private Wealth Advisor® designation. This designation specializes in issues and strategies that affect high-net-worth individuals, such as complex estate planning, estate tax minimization via efficient wealth transfer to beneficiaries, complex trust planning to minimize taxation and protect wealth from creditors, tax strategies surrounding equity compensation and tax-efficient diversification, effective and tax efficient charitable gifting strategies, Alternative Minimum Tax planning, and much more.

This blog series will touch on some of the more important strategies that can help high-net-worth families navigate their situation most efficiently and effectively!

As we approach the end of the year, many people begin to think about charitable giving. Whether it's supporting a local cause or contributing to a favorite national charity, giving back is not only rewarding but can also provide financial benefits. One tax strategy that has gained popularity in recent years is charitable bunching.

But what exactly is it, and how can it help you maximize your charitable impact while reducing your tax bill? Let’s dive in.

What is Charitable Bunching?

Charitable bunching is a tax strategy that involves "bunching" or grouping several years' worth of charitable contributions into a single tax year. Instead of donating the same amount every year, you consolidate multiple years of donations into one. This allows you to surpass the standard deduction threshold, making it more likely that you can itemize your deductions and receive a larger tax benefit.

How Charitable Bunching Works

To understand charitable bunching, it’s important to first grasp the concept of standard vs. itemized deductions:

Standard Deduction: This is a fixed deduction amount that every taxpayer can take. For 2024, it's $13,850 for single filers and $27,700 for married couples filing jointly.

Itemized Deductions: These are specific expenses that can be deducted, such as mortgage interest, state and local taxes, and charitable donations. To itemize, your total itemized deductions must exceed the standard deduction.

For many taxpayers, the standard deduction is more advantageous, but this means they do not get additional tax benefits from their charitable giving. Charitable bunching helps change that by allowing you to make a larger donation in one year, which may enable you to itemize your deductions that year.

Example of Charitable Bunching

Let’s say you typically donate $5,000 to charity each year. If you’re married and your other itemized deductions (like mortgage interest and state/local taxes) add up to $20,000, your total deductions are $25,000—less than the $27,700 standard deduction. Therefore, you would take the standard deduction, and your $5,000 charitable contribution wouldn’t provide an additional tax benefit.

However, if you decide to bunch 5 years of donations together and donate $25,000 in one year, your itemized deductions would now total $45,000, allowing you to exceed the standard deduction and potentially save more on your taxes. In the four following years, you could take the standard deduction again, alternating between itemizing and taking the standard deduction. See the chart below for a helpful visual. You can see by utilizing this strategy in this hypothetical situation the client reduced their taxable income by $41,800 by utilizing this bunching strategy compared to donating $5,000 each year.

Using Donor-Advised Funds for Flexibility

A common tool used for charitable bunching is a donor-advised fund (DAF). A DAF allows you to make a lump sum donation in a single year, receive an immediate tax deduction, and then distribute those funds to charities over time.

This gives you flexibility; even though you've bunched your donation for tax purposes, you can still support your favorite charities on your usual schedule.

The Benefits of Charitable Bunching

Maximizing Tax Deductions: By concentrating your giving into one year, you can potentially itemize your deductions and receive greater tax savings.
Maintaining Charitable Impact: Even if you’re giving in a lump sum for tax reasons, tools like DAFs allow you to maintain your usual charitable giving schedule.
Strategic Planning: Charitable bunching is especially effective for those who have fluctuating income, such as business owners, or those planning for retirement. By strategically choosing which years to itemize, you can manage your tax liability more effectively.

Is Charitable Bunching Right for You?

Charitable bunching can be a powerful tool, but it may not be suitable for everyone. It works best for individuals who have significant itemized deductions but don’t surpass the standard deduction threshold. It’s also a great option if you have a specific year when you anticipate higher income or a significant taxable event, such as selling a business or receiving a large bonus.

Charitable giving is a meaningful way to contribute to causes that matter to you, and charitable bunching can help you do so while also maximizing your tax benefits. However, like any tax strategy, it’s essential to consider your overall financial situation and future plans. Working with a financial advisor can help ensure that your approach to charitable giving aligns with your broader financial goals.

Maximizing Charitable Giving Through Charitable Bunching