Bunching: Help donors help you
As every nonprofit leader is no doubt aware, the rules for charitable deductions have changed over the last few years. The charitable contribution deduction is available only to taxpayers who itemize deductions, and because the standard deduction recently increased, many charities have seen a reduction in the number of donations and are rallying for legislation to help bring donors back.
Indeed, the standard deduction hike effective for tax years starting in 2018 has reduced the numbers of smaller-dollar donations, fulfilling many fundraisers' fears. Some donors, however, are wisely leveraging a partial workaround. By using a tax-smart method known as "bunching," many donors are recouping at least some of the missing tax benefits of their charitable contributions.
Now more than ever it is critical for nonprofit leaders to understand the concept of bunching and how it can help their donors provide steady financial support, despite less-than-ideal tax laws.
A brief history of the standard deduction is instructive.
- Beginning in 1944, the Internal Revenue Code provided for a 10-percent allowance from income to determine taxpayers' liability (if only it were that simple now!).
- 1974 was the last year the standard deduction ($1,300 that year) was the same for single and joint filers. Compared to single filers, joint filers had less than a 2:1 standard deduction ratio until 2003.
- The standard deduction has typically increased each year by an amount somewhere between $50 to $300, reaching $6,350 (single filers) and $12,700 (joint filers) in 2017.
- In 2018, the standard deduction jumped to $12,000 (single filers) and $24,000 (joint filers), and the deduction has been indexed for inflation each year since then.
It's not hard to see why the incentive to make smaller donations has been reduced so dramatically in the last four years.
The technique known as bunching (sometimes called "bundling") means a taxpayer aggregates multiple years of charitable donations into one year to deliberately exceed the standard deduction. For 2023, the standard deduction is $13,850 for single filers and $27,700 for joint filers. So, a couple who uses bunching to donate to your organization would give enough so that their total itemized deductions add up to more than $27,700 for this year. For example, if that couple typically gives your organization $10,000 per year, they could give $30,000 right now to take advantage of itemizing deductions. This is especially helpful to a donor who is having a relatively high-income year.
Keep these two items in mind:
The higher standard deduction is set to expire at the end of 2025. Without legislation extending the sunset date or making the provisions permanent, the standard deduction will drop back down. This will change the dynamics for your donors.
If a donor is reluctant to make multiple years of gifts directly to your organization up front, you still have options. Talk with the community foundation about working with the donor to establish a designated fund at the community foundation, such that the donor can make multiple years' worth of gifts up front but avoid the risk if something very unexpected were to cause your organization to become financially unstable.
Here are a few ways your donors can "bunch":
Cash is easy for a door to give in a year of surprise or higher-than-expected income. If a donor earned a bonus, received a significant raise, took a job buyout or had a significant liquidity event, surplus income could make bunching ideal. Keep an eye out for donors who may be in these situations so you can strike up the conversation.
Donating highly-appreciated marketable securities is extremely tax efficient. Stock given to a public charity typically is deductible at the asset's fair market value. Your charity, in turn, pays no capital gains tax on its sale of the asset, thereby generating more dollars to support your organization than you would have received if the donor had sold the stock and given the proceeds to your organization. Yes, the benefits of giving highly-appreciated stock are second nature to those of us who work in philanthropy every day. Remember, though, that your donors do not work in philanthropy every day and it is truly worth it to always mention this giving technique.
As with gifts of other long-term appreciated assets, a donor's gift of real estate avoids capital gains taxes and generates more money for your mission than if the donor had sold the property and donated the proceeds. Reach out to the community foundation for assistance when your donor would like to benefit your organization as well as others, or if your organization is not set up to accept real estate or other complex assets.
This content is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.