Are you saying you want an explicit calculation comparing the tax gains from bunching to the risk of never donating? The exact calculation will depend on people’s individual financial circumstances, but for the cases I’ve looked at, it comes out strongly against long-term bunching.
For example, consider someone earning $100k in MA and donating 10%. They have ~$5k in MA tax which they could potentially deduct if itemizing, but let’s say no other deductions. Six year bunching would be five years of donating $0 and taking the $12k standard deduction, and then one year of donating $60k and deducting $65k. This moves your year six federal income tax from $15k to $3k, saving you $12k in taxes on $60k in donations or 20%. That is clearly not worth a 50% chance of donating $0.
While people should consider their own tax circumstances and propensity to stop being altruistic, I think we should have a community default of “donate as you go, to a donor-advised fund if need be”.
Are you saying you want an explicit calculation comparing the tax gains from bunching to the risk of never donating?
I don’t disagree with your conclusion, I haven’t done the math yet. (Perhaps I should post a longer algorithm/closed form solution, or code up a widget.) It was a general nitpick regarding process, on a great post.
Six year bunching would be five years of donating $0 and taking the $12k standard deduction, and then one year of donating $60k and deducting $65k.
That is clearly not worth a 50% chance of donating $0.
Could bunching be implemented in a different order? Donate the 60k in year one, then 0 the following 5 years?*
I think we should have a community default of “donate as you go, to a donor-advised fund if need be”.
That seems like a reasonable default. Is there a particular fund you had in mind?*
*I don’t know much about this area. Prior to reading this post I’d never heard of donor-advised funds before. If these are basic questions I’d understand after reading a book on the subject, I’d appreciate recommendations.
In this case I’d done the rough math before posting to make sure it was in the right range, but as someone reading the post there wasn’t a way for you to know that ;)
Donate the 60k in year one, then 0 the following 5 years?
Sure, except extremely few people on a $100k salary who start wanting to donate 10% will have $60k in savings-they-can-do-without sitting around.
Are you saying you want an explicit calculation comparing the tax gains from bunching to the risk of never donating? The exact calculation will depend on people’s individual financial circumstances, but for the cases I’ve looked at, it comes out strongly against long-term bunching.
For example, consider someone earning $100k in MA and donating 10%. They have ~$5k in MA tax which they could potentially deduct if itemizing, but let’s say no other deductions. Six year bunching would be five years of donating $0 and taking the $12k standard deduction, and then one year of donating $60k and deducting $65k. This moves your year six federal income tax from $15k to $3k, saving you $12k in taxes on $60k in donations or 20%. That is clearly not worth a 50% chance of donating $0.
While people should consider their own tax circumstances and propensity to stop being altruistic, I think we should have a community default of “donate as you go, to a donor-advised fund if need be”.
I don’t disagree with your conclusion, I haven’t done the math yet. (Perhaps I should post a longer algorithm/closed form solution, or code up a widget.) It was a general nitpick regarding process, on a great post.
Could bunching be implemented in a different order? Donate the 60k in year one, then 0 the following 5 years?*
That seems like a reasonable default. Is there a particular fund you had in mind?*
*I don’t know much about this area. Prior to reading this post I’d never heard of donor-advised funds before. If these are basic questions I’d understand after reading a book on the subject, I’d appreciate recommendations.
In this case I’d done the rough math before posting to make sure it was in the right range, but as someone reading the post there wasn’t a way for you to know that ;)
Sure, except extremely few people on a $100k salary who start wanting to donate 10% will have $60k in savings-they-can-do-without sitting around.
Have a look at https://80000hours.org/2013/06/how-to-create-a-donor-advised-fund/ For comparing DAFs the main thing is to look at the fees and pick a cheap one, since it’s the same product everywhere. I know people who’ve used Vanguard and Fidelity.