The Tax Cuts and Jobs Act dramatically changed the tax landscape for itemizing deductions.
The tax law that became effective in 2018 eliminated most itemized deductions, limited the deduction for state and local taxes to $10,000, and doubled the standard deduction. While the new law did not impose new restrictions on the income tax charitable deduction, the tax benefits of charitable giving will be lost for taxpayers with itemized deductions less than the standard deduction. However, strategic “bunching” of charitable gifts can maximize these tax benefits. This is not a new giving strategy, but it is more relevant today than ever before.
What is “bunching,” you ask. Bunching is a giving strategy designed to maximize tax benefits by making gifts for multiple years in one tax year. By front-loading several years of charitable donations into a single tax year, you can once again realize the tax benefits from itemizing deductions.
For example, if you normally give $10,000 each March to support charities, you might consider also donating $10,000 in the Fall of the same year to support those charities for the coming year, thus “bunching” these gifts to make a $20,000 total donation for the tax year. Combined with deductions for state and local taxes, mortgage interest, etc., bunching charitable gifts in this way gives you total itemized deductions that are greater than your standard deduction. Since it will make sense to itemize, you will enjoy a tax benefit from your charitable deductions that may have been absent if you had split the donations over two years. In years when you don’t make charitable gifts, you would go back to taking the standard deduction.