The brilliance of bunching

 

“Bunching” is a strategy used to maximize a taxpayer’s itemized deduction and, perhaps more importantly, to maximize one’s charitable giving impact.  When the Tax Cuts and Jobs Act (TJCA) passed in December 2017, this strategy became even more useful.  In this article we will unpack the brilliant strategy of bunching!

Itemized vs. Standard deductions

Each year, you the taxpayer, can choose whether to itemize or take the standard deduction on your income tax return.  If the sum of your itemized deductions is greater than the standard deduction, you itemize.  If not, you go the standard deduction route.

The big four itemized deductions are:

      • SALT (State Taxes and Local Real Estate Taxes)
      • Home Mortgage Interest
      • Unreimbursed Medical Expenses
      • Charitable Contributions

Up until the 2017 Tax Reform, the Standard Deduction amounts were $6,350 for Single Filers and $12,700 for married filing jointly.  For 2024, those amounts are now $14,600 and $29,200, respectively.  Below were the additional changes made under the tax reform bill of 2017:

      • SALT (State Taxes and Real Estate Taxes primarily) are now limited to $10,000
      • Home Mortgage Interest is deductible, but only for the first $750,000 of mortgage debt
      • The threshold for Unreimbursed Medical Expenses has dropped from 10% to 7.5% of AGI
      • Charitable Contribution limits have increased from 50% of AGI to 60% of AGI
        • This was a high threshold to start and has added even more room to give and receive a tax benefit (this is where the bunching comes in… stay tuned)

The primary tax benefit of bunching

If you add up your itemized deductions and you are within earshot (think within $5,000) of the standard deduction limits, or even higher than, then you are in the sweet spot for bunching.

Scenario 1 – Without Bunching: Let us assume that you are Married Filing Jointly and desire to give $20,000 per year directly to charity, have no mortgage debt, have SALT that exceeds $10,000 (thus being limited to that number) and have no Unreimbursed Medical Expenses.  In this scenario your itemized deductions will be $30,000 (slightly greater than the standard deduction) which means you would ‘itemize’.  If this scenario holds true for 4-years, your total deductions would be $120,000 and you will have given $80,000 to charity.

 

Scenario 2 – With Bunching: In this scenario (with the same underlying assumptions) you decide to ‘bunch’ your charitable contributions using a Donor Advised Fund (more on DAFs in a bit).  In year 1 you contribute $40,000 into the DAF and itemize, in year 2 you make no contribution to the DAF and use the standard deduction, then repeat that pattern for years 3 and 4.  By alternating from using the itemized deduction to using the standard deduction, your total deductions over a 4-year period would be $158,400 ($38,400 more) and you still will have given $80,000 to charity.

 

Donor Advised Fund and the secondary tax benefit of bunching

For a more detailed article on Donor Advised Funds (DAF) click HERE.

In short, a DAF is a charity.  So, as illustrated in scenario 2, if you give $40,000 to the DAF in year 1 you get the full deduction in that year.  Then, once the monies are in the DAF you can direct those monies to be sent to your desired charity.  You do not have to send the monies to the end charity in the same calendar year, you can spread the $40,000 gifting over a 2-year period, or even longer.  And the monies can be reinvested within the DAF and grow tax free, thus maximizing your charitable impact.

In addition, the secondary tax benefit of using a DAF is that you can contribute appreciated securities instead of cash and you are sheltered from having to pay capital gains tax on those appreciated securities.  For example, let’s say you own ACME inc. in your Schwab after tax brokerage account.  You bought ACME for $10,000 several years ago and it is now worth $40,000.  So, you have a $30,000 unrealized capital gain.  You can contribute $40,000 worth of ACME to the DAF, receive a current year deduction for $40,000 and you are also sheltered from having to pay capital gains tax on the $30,000 growth!  A double tax benefit.

There you have it, now you can go forward confidently and brilliantly bunch your charitable gifts.  Or just call your P&A Advisor and ask them to help you make it happen!

 

 

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Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.  Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security.  To learn more about our firm and investment approach, check out our Form ADV.

 

To view this article and others like it online, visit the P&A blog at https://pittand.com/blog/.

Click here to download the PDF version of this article.

 

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Since 1995, Pittenger & Anderson has guided individuals and families going through money-in-motion events. We are a fee-only Registered Investment Advisor and a full-time fiduciary providing investment management, financial planning, and complimentary services to 800+ clients in over 30 U.S. states.

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