'Tis the Season to Be Bunchy

December is a busy time of year…holiday parties, shopping for gifts, and family gatherings. It is also a busy time of year for charitable giving. In fact, approximately one-third of charitable gifts occur in the month of December. As an advisor, it is very enjoyable to see the generosity of clients in support of charitable causes for which they are passionate. It is also rewarding to be in a position to help clients make their charitable gifts in the most tax efficient way possible. Typical strategies that we help clients execute on the charitable front include advising clients to use appreciated assets or making qualified charitable distributions from IRAs. However, one charitable giving strategy that continues to be somewhat overlooked is “bunching” of charitable gifts.

As we have written about extensively in the past, many important changes went into effect with the 2017 Tax Act. Perhaps most notable was the substantial increase in the standard deduction. The standard deduction was effectively doubled, which has resulted in fewer individuals itemizing on their income tax returns and thus not gaining an advantage from claiming the charitable income tax deduction. In 2019, the standard deduction for single filers is $12,200 and $24,400 for married couples who file jointly. The standard deduction can be thought of as a “hurdle rate.” If available deductions exceed $24,400 for a married couple in 2019, they would itemize. If not, they would take the standard deduction of $24,400 and the tax benefit of charitable gifting would no longer apply.

A strategy called bunching could help tax filers itemize deductions in a year when they otherwise wouldn’t be able to do so. Bunching, which is sometimes called pull-forward charitable planning, is a strategy where charitably inclined individuals may consolidate future years’ charitable gifts into the current tax year, thereby creating a larger current year amount. This will enable them to bunch their deductible charitable gifts into one calendar year in order to be able to itemize their tax deductions for that single calendar year. A related strategy is to boost gifts by completing larger gift commitments in a single year rather than over an extended pledge-payment period. Both strategies suggest giving the same amount to charity that would normally be completed, but to be mindful of the tax year in which charitable gifts are made.

The illustration below considers a married couple that would normally make charitable gifts of $25,000 over two-years (i.e. $12,500 each year). It further assumes the couple has $10,000 or more in state and local income, sales, and personal property taxes (the ability to itemize these taxes is capped at $10,000), and has no other deductions to itemize. Scenario 1 assumes that the couple bunches or boosts the $25,000 of charitable gifts that would normally take place over two years into 2019. Scenario 2 assumes that the couple spreads out the gifts evenly by making charitable gifts of $12,500 in 2019 and $12,500 in 2020. In both scenarios, the couple makes total charitable gifts of $25,000 over the two-year time-frame. Scenario 1, where bunching or boosting takes place, results in the tax filer being able to itemize in one tax year because (they would have $35,000 of deductions available in 2019; greater than the standard deduction amount of $24,400). Scenario 2, where the gifts are evenly split, results in the couple taking the standard deduction in 2019 and 2020. If the couple’s household income was $250,000, the total federal income tax savings from this strategy would approximate $5,000.

There is much reward in being able to support charitable causes that align with our philanthropic passions. Once charitably inclined individuals decide which charities and the level of desired support, proper planning can help boost tax savings. The team at Greenleaf Trust is well versed in philanthropic planning and we enjoy the process of helping clients support their chosen causes in the most efficient and effective way possible.