Tax Benefits: Try Bunching Charitable Donations

The Tax Cuts and Jobs Act (TCJA) virtually doubled the standard deduction through 2025. So fewer taxpayers are itemizing deductions these days. Instead, more people are claiming the standard deduction.

When making year-end charitable contributions, consider whether you’ll claim the standard deduction or itemize deductions on your 2024 federal tax return. If you expect to take the standard deduction for 2024, you won’t receive any tax benefit for making charitable contributions. For some taxpayers who expect to take the standard deduction, it makes sense to hold off on donating in 2024 and make a larger contribution in 2025. That way, if they itemize deductions for 2025, they can claim tax deductions for the amounts donated. The reverse situation also may apply if you’ll itemize in 2024, but expect to take the standard deduction in 2025.

Here’s more on the tax rules for charitable contributions and how the so-called “bunching” strategy works.

Charitable Contribution Basics

First and foremost, deductible contributions must be made to a qualified charitable organization approved by the IRS. The tax rules for deducting charitable contributions vary depending on what type of assets you donate.

For monetary contributions, you can generally deduct the full amount of your donations, up to 60% of your adjusted gross income (AGI) for the year. (Before the TCJA, the limit was 50%.) The AGI limit is 30% for cash donations to nonoperating private foundations. Any excess may be carried over for up to five years.

For gifts of long-term capital gains property, you can generally deduct the value of the property contributed, up to 30% of your AGI. The AGI limit is 20% for gifts to nonoperating private foundations. Any excess may be carried over for up to five years.

Suppose you donate property that has substantially appreciated in value. In that case, you may be in line for a special tax break. Normally, the value of a gift of property for tax deduction purposes is the property’s cost. However, if you donate property that you’ve held longer than one year, you can write off its fair market value on the donation date. No tax is due on the appreciation in value while you’ve owned the property, so you escape the long-term capital gains tax bill on these appreciated assets.

Other special rules and limits may come into play. For instance, donated property must be used to further the charitable organization’s tax-exempt mission. So, if you donate artwork to a museum, you might require the museum to display it in a prominent place. It can’t be locked away in a dusty storeroom where no one will see it.

In addition, you must observe strict recordkeeping rules before claiming any deduction. Beware: The IRS requires you to obtain a written acknowledgment from charitable organizations for monetary contributions of $250 or more. Even more details are required for property gifts. And, if the property is valued above $5,000, you must also obtain a written appraisal from a qualified appraiser.

Bunching Strategy

One classic tax-reduction strategy is bunching charitable contributions. Here, a taxpayer who normally makes regular annual contributions to charity makes larger contributions in alternating years and no gifts in the off years. This allows the taxpayer to claim itemized deductions in the years he or she makes large gifts — and claim the standard deduction in the off years.

To Itemize or Not to Itemize?

With the tax year winding down, it’s time to evaluate your personal tax situation. Will you claim the standard deduction or itemize deductions on your 2024 tax return? The answer matters when it comes to receiving tax benefits for your charitable contributions. In general, taxpayers should claim the higher of 1) the standard deduction, or 2) the amount of your qualified itemized deductions on your annual federal tax return.

The standard deduction is adjusted annually for inflation. For 2024, the standard deduction is:

• $14,600 for single people and married couples who file separately,
• $21,900 for heads of households, and
• $29,200 for married couples who file jointly.

For 2024, taxpayers who are age 65 or older or blind can claim an additional standard deduction of $1,950 ($1,550 if married).

Alternatively, you might decide to claim itemized deductions for such items as:

• Interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence,
• State and local taxes, including property tax and either income tax or sales tax,
• Personal casualty and theft losses due to a federally declared disaster,
• Medical expenses in excess of 7.5% of AGI, and
• Charitable contributions, subject to the limits listed above.

In addition to temporarily increasing the standard deduction, the Tax Cuts and Jobs Act (TCJA) includes provisions limiting certain itemized deductions. For example, through 2025, the TCJA limits your entire deduction for state and local taxes to $10,000 ($5,000 if you’re married and filing separately). It also places restrictions on personal casualty and theft losses and mortgage interest deductions, along with suspending miscellaneous itemized deductions through 2025 for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses. Under prior law, miscellaneous itemized deductions were subject to a 2%-of-AGI floor.

Your professional tax advisor can help you tally up your expected itemized deductions for 2024 to see where you stand for the tax year. He or she can also recommend strategies to lower your taxes.

Under this approach, if it appears that you’ll be itemizing deductions in 2024, you might step up your charitable gift-giving before year end. For instance, move donations planned for 2025 into 2024. The reverse situation may also make sense.

For example, Joe and Joanne are a married couple who file jointly. Their standard deduction is $29,200 for 2024. They expect to report the following itemizable expenses for 2024:

• $10,000 in state and local taxes, and
• $15,000 in mortgage interest.

So far, they’ve donated $4,000 to charity this year.

As things stand now, the couple has $29,000 of itemizable expenses for 2024, which is slightly less than their standard deduction ($29,200). Joanne would like to donate $8,000 to her favorite charity. Should they donate today or wait until 2025? Making the gift in 2024 would increase their itemizable deductions to $37,000, which is $7,800 more than the standard deduction. Assuming the couple is in the 32% federal tax bracket, contributing in 2024 would lower their tax bill by $2,496 (32% of $7,800), compared to claiming the standard deduction.

However, if the couple had incurred only $10,000 in itemizable expenses so far in 2024, it would make sense from a tax perspective to postpone their $8,000 donation until next year when their situation might change.

Important: The bunching strategy can also be applied to other itemizable expenses, such as mortgage interest, property tax and nonemergency medical costs.

Consider a DAF

Bunching gifts is relatively easy if you’ve already decided which of your favorite charities to contribute to at year end. You’ll just need to contribute the money or property to the qualified charities in the appropriate year and follow the recordkeeping rules. However, if you’re hard-pressed to divvy up your contributions on such short notice, consider setting up a donor advised fund (DAF).

With a DAF, you can donate in one fell swoop and secure your charitable contribution deduction for 2024. Then, the money will be invested, and the sponsoring organization can dole it out to charities at your discretion. You can make additional contributions to the DAF in the future.

For More Information

Of course, there’s more to charitable gift-giving than just tax considerations, but a tax deduction can sweeten the deal if fits into your plans. Don’t leave these decisions until year end. Contact your tax advisor soon to develop a charitable-giving plan that meets all your objectives.

Copyright 2024

This article appeared in Walz Group’s November 4, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.