Bunching: Help your 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% 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”:
Give cash
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.
Appreciated stock
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.
Real estate
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. We can help!
Learn more about donor-advised funds
Charitably-inclined individuals and families have many options for organizing their charitable giving. The community foundation works with a wide range of donors to help them establish a charitable giving plan to ensure that they can maximize their support of the causes they love.
The community foundation works with a donor to establish a fund that will best meet the donor’s needs and goals. Sometimes a donor establishes a designated fund to support one or more favorite charities. Donors also sometimes establish endowment funds to support a favorite charity. Field-of-interest funds are also popular to enable a donor to support a particular cause or address a specific community need over time.
Donor-advised funds are a popular fund because they give donors ease and flexibility without the administrative and tax hurdles of establishing a private foundation. Because of their flexibility and tax benefits, donor-advised funds frequently capture philanthropic dollars that otherwise would be left on the table, thereby increasing the overall amount of money available to your organization and other nonprofits in the community. This happens a lot when a donor wants to give real estate or a closely-held business to charitable causes, or even a large block of publicly-traded stock.
To learn more about how donors are currently viewing charitable giving in general, and the extent to which donors are aware of donor-advised funds (half of donors are familiar with the vehicle!), we recommend checking out the results of a recent study addressing charitable giving and transparency.
Above all, if you have any questions about how the community foundation works with donors through donor-advised funds and other vehicles to support your organization and others in the community, please ask! We invite you to reach out and we look forward to the conversation.
Worth a peek
Our team is dedicated to staying up-to-date with the latest trends in charitable giving. Here are a few of our team’s picks for deeper reading that may be of particular interest to nonprofit leaders.
The most recently-revised Code of Governance for charities is worth reviewing as a quick check-in as you review your board governance priorities. Nothing is a surprise; rather, the Code validates what high-performing organizations are already doing.
Generational differences in giving are illuminated in this recent study. Millennials are now giving more than Gen Xers! In other research results, volunteerism continues to emerge as an important factor to engage donors.
Many nonprofits are predicting a tough fundraising year, and that adds to the stress of declining revenues and increasing demands on charities’ budgets. Now is not the time to give up on fundraising, though. More than ever, charities need to stay focused on engaging donors in the organization’s important work.