In all the talk about the Tax Cuts and Jobs Act, you may have heard about the terming “bunching donations” being thrown around. What is it? Can it help your tax return?

“Donation bunching” is a tax strategy to attempt to maximize your tax deductions. Prior to 2018, it was much easier for taxpayers to itemize their deductions on a return. The Tax Cuts and Jobs Act increased the standard deduction for all individuals, making it harder to itemize.

Here’s a simple example:

• 2017
  • The standard deduction is $6,350.
  • Smith pays $4,000 of mortgage interest.
  • Smith pays $6,000 to charity.
  • Because his itemized deductions exceed the standard deduction, Pastor Smith would itemize his deductions for $10,000.
• 2018
  • The standard deduction is $12,000.
  • Pastor Smith pays $4,000 of mortgage interest.
  • Smith pays $6,000 to charity.
  • Because his itemized deductions are less than the standard deduction, Mr. Smith would take the standard deduction of $12,000.

At first, 2018 looks like it is better for Mr. Smith because he got a larger deduction. Unfortunately, it also means that his charitable donations earned him no tax benefits. He would have gotten the standard deduction regardless of what he donated.

This is where donation bunching comes into play. Rather than paying $6,000 to charity every year, Mr. Smith could combine two years of donations, paying $12,000 to charity in one year and $0 in the next. This would help him get over the itemized deduction threshold and get him some credit for his donations. Bunching charitable donations is legal, because all you are doing is changing the timing of when you donate to charities and how much.

There are still drawbacks to the strategy, though.

First, donation bunching is a good idea in theory, but in practice most people donate out of moral and spiritual commitments, not to maximize their tax benefits. Many people could not go an entire year without donating to their charities.

Second, it requires a large cash commitment for the donating years. It can be difficult to set money aside while you wait to donate.

Third, the strategy could negatively affect charitable organizations, who will start seeing donations in huge crests and valleys rather than a steady stream of income. Non-profits and charitable organizations will have to start planning around these unusual budget shortfalls and surpluses.

Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com