The Bunching Strategy: Getting More from Charitable Giving in High-Income Years
If you give generously every year and your CPA keeps telling you the gifts no longer show up on your tax return, you are not doing anything wrong. The rules changed. Since the standard deduction roughly doubled, many families who used to itemize their deductions no longer do, and apart from a small allowance current law gives non-itemizers for certain cash gifts made directly to charities, charitable gifts only reduce taxes when you itemize. The result is a common, quiet frustration: "I give the same amount every year. Why doesn't it matter anymore?"
There is a practical answer, and it does not involve giving less. It involves changing when you give, not how much. Advisors call it bunching, and it pairs naturally with a donor-advised fund. Here is how the two work together, who tends to benefit, and what the strategy does not do.
Why Annual Giving Stopped Moving the Tax Needle
A quick refresher on the mechanics. Every year, you choose between two ways of reducing taxable income: the standard deduction (a flat amount everyone gets) or itemized deductions (the sum of specific expenses such as mortgage interest, state and local taxes up to current limits, and charitable gifts). You take whichever is larger.
When the standard deduction is high, many households find that their itemized deductions fall short of it even after a healthy charitable gift. The gift is still meaningful to the charity, but it produces little or no incremental tax benefit. You would have received the standard deduction anyway.
The problem is not the giving. The problem is spreading it evenly. Steady, moderate annual gifts often disappear beneath the standard deduction year after year.
How Bunching Works
Bunching means compressing several years of planned giving into a single tax year, then taking the standard deduction in the years between.
Say a family normally gives a set amount each year and never clears the itemizing threshold. Instead, they give three or five years' worth in one year. That single large gift, stacked on top of their other itemizable expenses, can push them well past the standard deduction, so the giving finally produces a deduction. In the off years, they simply claim the standard deduction they were going to claim anyway.
Over the full cycle, the charities receive the same total support. The family's total deductions, however, may be higher over the giving cycle, depending on the household's deductions and current tax law.
Bunching tends to matter most when the big-gift year is also a high-income year, because a deduction offsets income that would otherwise be taxed at your highest bracket. That is where the timing conversation begins.
Where a Donor-Advised Fund Comes In
The obvious objection to bunching: your church, your alma mater, and the food bank operate on annual budgets. Handing them five years of support at once and then going quiet is awkward for them and unsatisfying for you.
A donor-advised fund (DAF) solves that. A DAF is a charitable account you fund with an irrevocable contribution. You take the charitable deduction in the year you contribute, but you recommend grants from the account to the charities you support on whatever schedule you like: this year, next year, or over the next decade. The money can stay invested inside the fund while it waits, and any growth is also earmarked for charity.
Bunch the deduction, smooth the giving. You make one large contribution to the DAF in the high-income year, then keep granting to your charities on the same steady rhythm they have always counted on. If grants are recommended on the same schedule, the charities may experience little or no change in the timing of support. From a tax perspective, however, the timing of the deduction may differ significantly.
We wrote a full explainer on how these accounts work, including sponsors, costs, and mechanics: What Is a Donor-Advised Fund?
Give Appreciated Securities, Not Cash, When You Can
What you contribute matters almost as much as when.
If you fund the DAF with long-held stock or fund shares that have appreciated, two things generally happen. First, you can typically deduct the fair market value of the shares, subject to current limits based on your income (your CPA will run these numbers). Second, neither you nor the DAF pays capital gains tax on the appreciation, because the shares were donated rather than sold. The embedded gain simply leaves your balance sheet along with the shares.
Compared with donating appreciated securities directly, selling first may result in less remaining for charitable giving after taxes, depending on the circumstances.
This is why bunching conversations so often surface in portfolios with concentrated stock. A large position in a single company (an employer's stock, an inherited holding) often carries the largest unrealized gains, and it is frequently the position a family most wants to trim anyway. Funding a DAF with those shares can advance two goals at once: the giving plan and the diversification plan.
One note of discipline: this works for appreciated positions, not depreciated ones. If a holding is worth less than you paid, many taxpayers choose to sell the position, realize the capital loss if appropriate, and donate cash or other appreciated assets instead. Coordinate the specifics with your CPA.
When Bunching Tends to Fit, and When It Does Not
We would rather tell you plainly now than let you discover it later. This strategy earns its keep in specific situations and is unnecessary in others.
It tends to fit when
You are selling a business. A sale year often produces the highest taxable income of your life. Funding a DAF in that year, potentially with several years' worth of intended giving, places the deduction against your highest-ever bracket.
Heavy RSU vesting or option exercises. Restricted stock units (RSUs) are shares your employer grants that become yours, and become taxable, on a vesting schedule. Vesting years can spike income in ways salary never did, which makes them natural bunching years. Long-held appreciated shares from earlier grants can be the funding source.
A Roth conversion year. A conversion moves money from a pre-tax retirement account to a Roth account, deliberately adding taxable income now in exchange for tax-free growth later. A bunched DAF contribution in the same year can offset part of the conversion's income, softening the current-year cost of a long-term move.
You give consistently but no longer itemize. Even without an income spike, bunching every few years can beat giving the same total evenly.
It tends not to fit when
Your giving is modest relative to the standard deduction. If even a bunched gift would not carry you past the itemizing threshold, the mechanics do not pay off.
You may need the money. DAF contributions are irrevocable. Once contributed, the assets belong to charity permanently. This should be money your plan has genuinely released.
You already itemize comfortably every year. If mortgage interest and other deductions mean your annual gifts already count in full, bunching adds complexity without much benefit.
What bunching does not do
It does not create wealth, and it does not make giving free. You are still giving the money away; the strategy simply reduces the tax cost of generosity you already intended. It does not let you take money back out of the DAF, pay yourself, or satisfy a binding personal pledge in ways the rules prohibit. And it does not replace personalized tax advice: contribution limits, carryforward rules (which let unused deductions roll into future years), and state treatment all depend on current law and your specific return.
The Bottom Line
If you give steadily and see a high-income year coming, whether from a business sale, a large vesting tranche, or a Roth conversion, bunching several years of giving into a donor-advised fund, ideally funded with appreciated securities, may allow charitable deductions that otherwise would not produce additional tax benefit to become more valuable under current tax rules. The strategy is irrevocable, needs careful sizing against current limits, and is often most effective when incorporated into a coordinated financial, tax, and estate plan, rather than a year-end scramble. Fortress Financial Group is a fee-only fiduciary advisory firm, with offices in Rochester, Minnesota and Scottsdale, Arizona. We do not prepare tax returns or draft legal documents, but we build giving strategies alongside our clients' CPAs and attorneys, when authorized by clients, so the pieces fit together. If you are weighing whether bunching belongs in your plan, we are glad to talk it through in a 30-minute introductory call.
Disclosure
Fortress Financial Group ("Fortress") is a registered investment adviser. Registration as an investment adviser does not imply any level of skill or training. This article is provided for informational and educational purposes only and should not be construed as personalized investment, legal, accounting, or tax advice, or as a recommendation to implement any particular charitable or tax planning strategy. Tax laws and regulations are subject to change, and the availability and effectiveness of any planning strategy depends on individual circumstances. Investors should consult their financial advisor, CPA, attorney, or other qualified professionals before making financial, tax, legal, or charitable planning decisions..
