The Grouping Strategy for Charitable Giving – AMAC
Sponsored by – DonorsTrust
By – Jeff Zysik
Ever since Trump’s 2017 tax cuts, you may have seen tax experts and financial advisers promoting the strategy of charity “bundling.” The grouping strategy emerged when the standard deduction doubled for tax years beginning with 2018.
The strategy allows charitable taxpayers to maximize their overall tax deductions for a two-year period by “bundling” charitable donations in one tax year and then taking a break from direct charitable donations the following year.
Grouping your donations into one of the two tax years allows you to reduce your combined income tax for the first and second year by increasing your overall deductions for the first and second year.
Bundling maximizes your deductions, reducing your income tax over a two-year period. This article explains charity bundling using examples that will hopefully help you decide if this is the right strategy for you.
How it works
When preparing your tax return, you have two choices: claim your itemized deductions or take the standard deduction. For 2022, the standard deduction for married taxpayers filing jointly is $25,900 ($12,950 for single filing individuals). So, only if your overall itemized deductions exceed $25,900 (for married taxpayers) will you qualify for itemized deductions.
Example 1: You are a married taxpayer and make charitable donations totaling $15,000 on average per tax year. Your other itemized deductions average $8,000 each year. So, on average, your overall itemized deductions are $23,000 per tax year. You will get the standard deduction for 2022. The standard deduction decreases your taxable income by $2,900 because the standard deduction increases your deductions by $2,900 ($25,900 standard deduction vs. overall itemized deductions of $23,000) . If you’re in the 24% tax bracket, you save $696 in federal income tax by taking the standard deduction rather than itemizing the deductions – or $1,392 in total over tax years one and two (excluding any increase in the itemized deduction for the second year).
The grouping strategy consists of maximizing the impact of your itemized deductions over a two-year tax horizon. Here’s how it works. Using the facts from example one, if you move all your charitable donations for the first or second tax year, in other words, grouping your charitable donations in one of the two tax years – you maximize the impact of your itemized deductions and to diminish your overall tax burden over the two-year period.
Example 2: Same facts as example one, except you move all of your charitable donations to 2022. Now your itemized deductions in 2022 are $38,000. Your itemized deductions for 2023 are $8,000 since you are skipping direct charitable donations in 2023. For 2022, you are claiming $38,000 in itemized deductions. For 2023, you are claiming the standard deduction of $25,900 (likely the 2023 standard deduction will be higher due to indexation) since your itemized deductions are only $8,000. What have you accomplished? Combining charitable donations in 2022 gives $63,900 in total deductions over 2022 and 2023 ($38,000 plus $25,900), unlike the $51,800 deductions over tax years 2022 and 2023 ($25,900 plus $25,900) without consolidation. Bundling increases your total deductions by $12,100, resulting in federal tax savings of $2,904 for a taxpayer who declares himself married and is in the 24% tax bracket.
Who should regroup?
Who does bundling work for? Anyone whose overall itemized deductions excluding the charitable deduction are generally less than their standard deduction may benefit from the pooling (provided that the total of the pooled donations plus other itemized deductions in the year of the donation exceed the standard deduction available). If that’s you, the grouping is worth the detour.
Example three: You are married and file a joint return, but you have no itemized deductions other than the $15,000 you give to charity each year. If you donate $30,000 in 2022 and nothing in 2023, you increase your total 2023 deductions by $4,100 (again, assuming no change in itemized deduction amount between 2022 and 2023). Why? In 2022, you itemize the deductions, claiming $30,000. In 2023, you benefit from the standard deduction of $25,900. The total deductions in the first and second year are $55,900, compared to $51,800 if you had donated $15,000 in 2022 and 2023. Remember that you would have claimed the standard deduction of $25,900 each year for a total of $51,800. If you are in the 24% tax bracket, consolidation saves you $984 given these facts ($4,100 increase in deductions multiplied by 24%).
Of course, the tax savings are greater if you generally give more.
Example 4: You are married and file a joint return, but you have no itemized deductions other than the $30,000 you give to charity each year. If you donate $60,000 in the first tax year and nothing in the second tax year, you increase your overall first and second year deductions by $25,900. Why? In the first year, you itemize the deductions, claiming $60,000. In the second year, you benefit from the standard deduction of $25,900. The total deductions in the first and second year are $85,900, compared to $60,000 if you gave $30,000 in the first year and $30,000 in the second year. If you’re in the 24% tax bracket, consolidation saves you $6,216 over a two-year period.
As you can see, grouping is a powerful strategy. Note that the maximum amount that consolidation can reduce federal income tax is equal to the amount of the applicable standard deduction multiplied by the applicable marginal tax bracket – but that’s a discussion for another time.
Protect the charities you love
One concern you may have is that you don’t want to double what you provide to particular charities in one year and then provide nothing the next tax year. There is a simple solution to this, which is why this article has used the term “direct charitable giving”.
By combining bundling with a donor-advised fund account, you can smooth out the amount your favorite charities receive on an annual basis and maintain their funding from you in line with your previous year’s donations, while maximizing your tax deductions.
A donor-advised fund account, offered by charities such as DonorsTrust (where I work) or offered by financial institutions and community foundations, works the same way as a charitable savings account. This one-minute video walks you through the basics. Donor-advised funds are the fastest growing charitable tool in the country, and aggregation is a part of that.
If your pooled contribution is directed to a donor-advised fund account, from which you recommend grants over a multi-year period, you can continue to provide the same level of dollar support to your preferred organizations on an annual basis. so that using the grouping strategy will not affect your donation pattern.
Consider the facts of example three. If you choose a pooling strategy with a donor-advised fund account, you contribute $30,000 to your donor-advised fund in the first year, saving you $984 in taxes over the two years. You can then recommend donations of $15,000 in the first and second year to your favorite charities.
Combining a pooling strategy with a donor-directed fund account allows you to maintain the charitable impact you want and, with the taxes you’ll save, perhaps increase it even further.
Keep in mind that the discussion above is illustrative and educational in nature only. We are not a law or accounting firm and cannot offer tax advice specific to your situation. This discussion is presented for educational purposes only. Before making any decisions that impact your taxes, you should review your specific pattern of facts with your tax advisor.
Jeff Zysik is COO and CFO at DonorsTrust. He is a lawyer and accountant with fifteen years of tax planning experience, focusing primarily on sophisticated estate and income tax concepts. Prior to joining DonorsTrust, he was Managing Director and Co-Founder of Charitable Entity Administration, LLC (CEA).
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