"Bunching" is a tax strategy that allows individuals to maximize their tax savings by grouping their charitable contributions for multiple years into a single year. This allows them to itemize their tax deductions in one year and take the standard deduction in the other years. This strategy is particularly useful for those who regularly donate to charity but do not exceed the standard deduction threshold, which is $12,950 for individual taxpayers and $25,900 for those who are married and filing jointly in 2022.
For example, a single tax filer who wants to donate $5,000 a year to charity can double that amount by bundling two years of contributions in one tax year, reaching a total of $10,000. This, combined with other common tax deductions like mortgage interest, can help them exceed the standard deduction threshold.
One great way to implement this strategy is through a Donor-Advised Fund (DAF) like Daffy. For instance, in a hypothetical scenario, Leah, a salesperson at a major software company, uses Daffy to make a $10,000 contribution from her bonus. This large donation allows her to itemize her deductions, reducing her taxable income. Moreover, Leah doesn't have to distribute the funds to charities immediately; she can invest those funds with tax-free growth and spread her contributions out over the next two or three years.
Bunching isn't right for everyone, but it can be a highly effective strategy for those who have a major increase in taxable income, are close to being able to itemize their tax deductions, or want to make a large donation to a charity. Daffy makes this process easy and efficient, allowing you to maximize your tax savings while making a difference in the world.
Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.