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You hear the word batch and you think — yep — cookies.  At least we do.  But, there’s another application of the word you should know.  Why?  Because it can save you money on your taxes.

 

Here’s the deal: At year-end many people look to make the most of our charitable contributions — not only so that we can help the people or causes most in need, but also so we can see the most benefit on our taxes. When we make a charitable contribution to a qualified 501c3 non-profit organization, we may be able to take a tax deduction for our donation. But how does it work, exactly? And how might it change in the near future? 

 

In 2017, the US passed the Tax Cuts and Jobs Act.  This law substantially increased what’s called the “standard deduction” — the dollar amount each person can deduct from your taxable income every year, in order to reduce how much you pay in taxes to the IRS. Prior to the passage of that law, many people “itemized” on when they filed their taxes.  They added up all of their deductions (not just for charitable contributions, but qualifying medical bills, mortgage interest, state and local taxes and other things) and if they exceeded what was then a smaller standard deduction, they itemized.  After the law passed? Not so much. 

 

For the 2023 tax year, the standard deduction for taxpayers is $13,850 for single-filers and $27,700 for couples.  This means that you’d need to have more than that amount in itemized deductions in 2023 in order to make it worthwhile for you to itemize things.  And while some of us may have itemized medical expenses or mortgage interest that will push us over that threshold, many of us won’t come close to topping those dollar amounts.  Roughly 90 percent of people no longer itemize.   

 
The fact that smaller charitable contributions no longer “count” as tax deductible write-offs has hurt charities.  Nearly 5 million fewer people gave to charity in 2022 than in 2019, according to Charities Aid Foundation, and from 2021 to 2022, charitable giving dropped by 3.4% overall, according to The Lilly Family School of Philanthropy 

 

But if you want to give — and reap the rewards on your taxes — there’s a workaround.  Batching your donations (and other deductions) in other words, loading more of them into a single calendar year can make itemizing pay.  Here’s a rundown.  

 

First, Understand What Qualifies As a Donation 
 
According to the IRS, a donation or gift is considered tax-deductible if it's made to a recognized 501c3 charitable organization. [LINK TO NOV 1: HOW TO CHOOSE A REPUTABLE CHARITY.] While not all 501c3 non-profits are charities (for example, your credit union is a 501c3, but not a charity) any organization operating as a charity must be a 501c3 in order for you to get a tax write-off for the donations you make.  

 

Also, any donation you make must be made during the tax year in order for it to be deductible on your taxes for that year — in other words, you can’t make a donation in 2023 and write off in 2025.  And if you donate property (such as real estate, furniture, or a used car), you can only deduct what’s known as “fair market value” of the property, per IRS rules. In other words, if you donate a car to charity, you can’t say it’s worth $20,000 when you could probably only get $2,000 for it if you sold it, based on its condition and market trends.  

 

For those of us who have several donations we’d like to make — or a few deductions to take for things like medical expenses or mortgage interest — it may make financial sense to lump them into a single calendar year.   That’s where batching comes in…  

 

Combining Your Charitable Gifts 

  

“For those who are philanthropically inclined, batching donations is a strategy that involves lumping together charitable donations into a single tax year rather than spreading them out over multiple tax years,” explains certified financial planner Will Brennan at Park Hill Financial Planning and Investment Management.  

 

Essentially, with this strategy, you’d look to make big charitable gifts in alternate years — or even every 3-5 years — in order to donate enough so that you climb over the standard deduction threshold, which allows you to itemize your deductions for a bigger tax break. This strategy used to be called “lumping” or “clumping” and is now often referred to as “batching” or “bundling.”  
 
“If you tend to make bigger contributions to nonprofits that are tax-deductible, but you don't have a ton of other deductible items like mortgage interest, you might be losing out on reducing your taxable income — unless you batch donations,” explains certified financial planner Rachel Lawrence, founder and CEO of Reverie Wealth.  

 

Then in your off, unbatched years, you would simply take the standard deduction on your taxes, and set aside the gift money for your next batched one.  And if you find you still need a bigger bump to get you over the standard deduction threshold, take a look at everything you may have to deduct, including state and local taxes and mortgage interest, and medical expenses. It may be that in a year with a large medical bill, it finally makes sense to bundle your charitable contributions to get the most bang for your buck.  

  

The Bottom Line  

 

Before you choose a strategy, chat with your tax preparer and let them know what you’re planning — they may be able to offer helpful strategies that will help set you up for success in the years you bundle your deductions.  

 

Also, remember to take careful notes on all of the donations you make to charity, and keep all your receipts when you do so. The IRS will require proof of the donations you make to qualified 501c3 charities, in the same way that they need to see receipts for qualified medical expenses.  

 

Finally, note — this may all change in the very near future.  Many of the provisions of the Tax Cuts and Jobs Act are set to sunset in the next few years — in other words, to go back to closer to what they were before.  The standard deduction is one of them.  Unless Congress acts (and it very well might), the standard deduction is expected to be reduced by about half in 2026. Combine this with other provisions that are expiring (like the cap on SALT or State And Local Taxes) and it will once again make sense for more people to itemize. We’ll keep you posted. 

Post by Jean Chatzky’s HerMoney Team
November 2, 2023
Jean has partnered with Filene and believes in the credit union model. She and the HerMoney organization are providing these resources to support Members Choice Credit Union's efforts to advance their members’ financial wellness.

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