Bundling donations to lower your taxable income
Updated: Oct 15
Bundling, also known as bunching, is just one more way to maximize tax benefits when it comes to donating. Bundling will help you lower your taxable income if you decide to itemize your deductions (rather than take the standard deduction).
First, a refresher on the standard deduction (also discussed in this post on charitable tax breaks). The standard deduction is a fixed reduction in your taxable income, while itemizing deductions involves listing specific eligible expenses, like mortgage interest or charitable giving, to reduce your taxable income. You choose either to take the standard deduction or to itemize based on which gives you a larger tax benefit. (You can view a complete list of what is deductible on the IRS Schedule A Form1040). Generally speaking, you can only itemize charitable contributions if you are making donations to qualified 501(c)(3) nonprofit organizations, although there are some exceptions.
The vast majority of Americans claim the standard deduction because it is so high (in 2023, it is $13,850 for single filers and $27,700 for married filing jointly). This means you’d have to donate enough money in any given tax year, to bring you above that standard deduction amount that it’s worth it to itemize your deductions. Translation: you have to be donating meaningful sums of money to see a tax deduction.
So for those of you who are aiming to donate meaningful sums of money but still won’t meet or exceed the standard deduction, it could be worth bundling. This means combining multiple years worth of donations into one. For most people, bundling extends to combining two to three years of donations into one substantial year. Take this example. Instead of donating $5,000 over the next 5 years, you could bunch those donations into one to bring you above the standard deduction.
I personally don’t advise stretching this timeline out any further than two or three years. If you ask me, “Should I bundle 6 years of donations into one year?”, I would say forget it. Why? The timeline is too long. First, when we delay our donations, we are preventing charities from receiving much needed funding today. Second, I believe in habit formation. If you make the choice today to donate 6 years from now, but have not actively made any donations between now and then, chances are you might simply forget to make that donation years from now, or perhaps your circumstances change and you decide you can no longer give away such a vast sum of money. It’s for this reason that I think it’s easier for us to maintain a donation strategy if the sums are more manageable and happen on a more consistent basis.
In the pursuit of tax optimization, we often lose sight of why we donate in the first place. Perfect can be the enemy of good. So remember, only bundle if it’s within a reasonable time frame.
Lastly, bundling works when making direct cash donations as well as donating securities (e.g. stocks, bonds, funds, or ETFs). If you’ve held onto that stock or bond for more than a year, the value will be determined based on the date of your donation. If you’ve owned the asset for less than a year, then you only get to deduct the original purchase price (e.g. cost basis) and not any of the appreciated value.
For a more comprehensive understanding of how to apply these tax-efficiencies to your donation strategy, make sure to download Yield & Spread’s Giving Guide.
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