As tax laws evolve, many taxpayers keen on charitable giving are seeking efficient ways to maximize the impact of their donations while optimizing their tax benefits. One of the lesser-known but highly effective strategies in the realm of giving is the concept of "bunching" charitable contributions. This method, enhanced by new tax laws, can significantly increase your tax deductions over a shorter period. Let's dive into how you can leverage this technique.

Understanding Bunching

Bunching is a tax planning technique where you consolidate your charitable donations that would typically be made over multiple years into one large contribution. This strategy can help you surpass the standard deduction threshold, allowing you to itemize deductions and boost your tax savings. Here's how you can start:

• Assess Your Usual Charitable Contributions: Begin by calculating how much you usually donate each year and consider if these amounts, when combined over two or more years, exceed your standard deduction.
• Plan Your Donation Schedule: Decide if you want to double up your donations in one year and skip the next, or perhaps accumulate donations over two years and then make a large contribution in the third year. This method depends heavily on your financial flexibility and charitable inclinations.
• Consult with Tax Professionals: Since tax laws continually change and personal finances vary, consulting with a tax advisor or financial planner is crucial in executing this strategy effectively.

Benefits of Bunching Charitable Donations

The main advantage of bunching is maximizing tax deductions in strategic years. Here are specific benefits:

• Tax Efficiency: By consolidating donations, you exceed the itemization threshold, which may lead to greater tax savings than by simply claiming the standard deduction each year.
• Philanthropic Impact: Bunching allows you to make a more significant impact in a given year, which can be particularly helpful to charities requiring large lump sums for special projects or emergencies.
• Financial Planning: Bunching donations can be an integral part of broader financial and estate planning, aligning your philanthropic activities with your overall financial goals.

Implementing Your Strategy

To effectively implement bunching, consider the following key points:

1. Determine Your Charitable Goals: Identify the causes or organizations that are most important to you and understand how your donations can make a difference.
2. Use a Donor-Advised Fund (DAF): DAFs serve as an excellent vehicle for bunching contributions. You can contribute a larger amount into a DAF and get the deduction in that year while advising grants from the fund over subsequent years.
3. Mind State and Local Taxes: Be aware of the specific contributions that are deductible under state and local tax regulations, as this might differ from federal rules.
4. Monitor Tax Law Changes: Always stay updated on tax law alterations that could affect the strategy's effectiveness, either positively or negatively.

Conclusion

With strategic planning and careful consideration of your philanthropic and financial circumstances, bunching charitable contributions can be a powerful method to enhance both your charitable impact and tax savings. However, this should be part of a more comprehensive approach to strategic giving.

To save on taxes by using the strategic giving blueprint, which smartly utilizes nonprofits like private foundations and donor-advised funds, consider scheduling a call with Together CFO.