The Ultra-Wealthy Use the ‘Bunching Strategy’ To Save on Taxes: Here’s How You Can Do It Too
There are a number of tricks and loopholes the wealthy use to save on their tax bill, one of which is known as the “bunching strategy.” If you’re unfamiliar, you could be missing out on a way to save on your own taxes — even if you’re not a member of the 1%.
Here’s a breakdown of exactly what the strategy entails, why the rich love it and how you can use it too.
What Is the ‘Bunching Strategy?’
The bunching strategy involves grouping charitable contributions for a maximum tax benefit.
“Ever since the 2017 Tax Cut & Jobs Act, most households don’t have enough charitable donations to clear the standard deduction,” said Adam Nash, co-founder and CEO of the donor-advised fund Daffy.org. “Bunching is a tax strategy in which you group your charitable contributions for multiple years into a single year so that you can itemize your tax deductions in one year and take the standard deduction in the other years. It allows you to maximize your tax savings without changing how much you give to charity.”
The bunching strategy is an effective way to compensate for an increasingly high standard deduction.
“While a generous standard deduction means bigger tax relief for many, it also means that fewer people are able to use their preferred tax deductions, like charitable giving, because the threshold to start itemizing is much higher,” Nash said. “However, the bunching strategy helps people who don’t normally get to itemize their deductions get access to the charitable deduction.”
Take Our Poll: What Do You Plan To Use Your Tax Refund For?
Why the Ultra-Wealthy Love the Bunching Strategy
“The wealthy tend to have highly variable income, so bunching allows them to take the charitable deduction in the years where they have the highest tax rates,” Nash said. “Additionally, the wealthy tend to have professional financial advisors and accountants, which means they likely have access to a donor-advised fund. Donor-advised funds allow you to contribute a larger amount in one tax year, claim your full deduction in that year and then distribute those funds to support your favorite nonprofits over multiple years.”
While some donor-advised funds have high administration fees and high minimums — which is why they are mainly utilized by the rich — there are some that are accessible to almost anyone.
“Even Vanguard Charitable has an account minimum of $25,000, but with Daffy.org, we have no account minimum and it’s even free for accounts with a balance of under $100,” Nash said.
How the Average Person Can Use the Bunching Strategy
Nash said that the bunching strategy can be even more beneficial for the average taxpayer versus an ultra-wealthy individual since the threshold to start itemizing is now higher than it used to be.
“Bunching helps people who don’t normally get to itemize their deductions get access to the charitable deduction,” he said.
In 2023, the standard deduction is $13,850 for single taxpayers and for those who are married and filing jointly, it is $27,700. Nash offered a sample scenario to bring the benefits to life, looking at a single taxpayer who typically donates $6,000 to charity every year.
“In a normal year, their itemized deductions would be less than the standard deduction of $13,850 for single taxpayers. In this scenario, they cannot meet the threshold to itemize IRS charitable contributions in 2023, so they would typically claim the standard deduction without any of that $6,000 being used to lower their taxable income,” he said. “However, if they decide to bunch their donations — instead of making three separate $6,000 donations in 2023, 2024 and 2025, they make one lump-sum donation of $18,000 into a donor-advised fund in 2023 — the new total for itemized deductions is $18,000, which far exceeds the 2023 standard deduction of $13,850.
“If you assume the taxpayer is in the 24% tax bracket, they were able to increase their federal tax savings by 30%, and will have an additional $1,000,” Nash continued. “The funds are invested tax-free in the donor-advised fund, allowing them to still make their $6,000 donations for three years, with an opportunity to be even more generous as their fund grows over time.”
More From GOBankingRates