The 2017 Republican smash-and-grab tax reform bill made two related changes to individual tax deductions:
- The standard deduction was raised to 12,000 for individuals and 24,000 for joint filers;
- and the state-and-local-tax (SALT) itemized deduction was limited to $10,000.
Meanwhile, the charitable contribution deduction was unchanged, and the mortgage interest deduction was unchanged for existing mortgages (interest deductibility was limited to $750,000 for new mortgages).
Altogether, that means in order to make their state and local taxes deductible at all, taxpayers need to have additional itemized deductions such that their total itemized deductions exceed the standard deduction. To receive the benefits of the maximum $10,000 SALT deduction, they’d ideally have additional deductions equal to or greater than their standard deduction: $12,000 or $24,000 in combined mortgage interest and charitable contributions.
What is “charitable clumping?”
As the always-effervescent Michael Kitces helpfully explains, charitable clumping refers to the idea of making the equivalent of several years of charitable contributions in a single year, raising the taxpayer’s itemized deductions above the standard deduction and allowing them to claim all or part of the SALT deduction they’d otherwise be unable to claim.
In theory, there is no obstacle to doing this. Indeed, an organization should theoretically be grateful to receive several years of contributions up front, especially taking into account the time value of money.
In practice this makes no sense
There are two obvious problems with “charitable clumping” in practice.
First, non-profits spend essentially all of their revenue each year. If you’ve ever contributed so much as a dollar to a non-profit organization, you are well aware of the barrage of fundraising pitches you begin to receive immediately and which will never, ever stop. Non-profits have short memories. I have a family member who’s a prodigious philanthropist but if she stopped giving to the Five Valleys Land Trust for 4 years she’d simply stop being invited to their events. What would they want a deadbeat there for? They already have her money, after all!
If non-profits have short memories, I bet your church has an even shorter one. Are you going to give $25,000 to your church this year and then skip on tithing for the next decade? Are you going to explain to your rabbi that you were really making ten $2,500 annual gifts all at once? Good luck.
But the second problem should be taken just as seriously: people make charitable contributions annually based on their present economic circumstances. The problem with making a large upfront contribution based on your estimated future giving is that your future giving is only estimated.
Kitces’s suggestion of making your upfront contribution to a donor-advised fund, which gives you the ability to “recommend” grants of the account’s balance in future years, potentially solves the first problem, but not the second. Your contribution to a donor-advised fund is completely irrevocable — there are no hardship withdrawals, no loans against the balance, no way to pay a tax penalty to get the money back.
That means charitable clumping can only make sense for a strange subset of taxpayers: those who have so much money that they can afford to make tomorrow’s contributions today, but whose annual charitable giving is so low that, combined with mortgage interest, it doesn’t exceed the standard deduction. If that describes you, I guess go ahead.
Conclusion
Upon even a moment’s reflection, it should be obvious that “charitable clumping” is not a tax planning strategy at all: it’s a marketing campaign by non-profits and donor-advised-fund administrators.
The former want you to “clump” your contributions this year, while having every intention of returning next quarter or next year to ask for another “clump.”
The latter want to charge 0.6% of the assets under management each year, plus the management fees for your underlying investments.
For the right taxpayer, in the right tax bracket, who’s able to reach the right understanding with their preferred philanthropies, that may be a small price to pay. But the overwhelming majority of taxpayers should spend exactly no time thinking about how they’re going to game the new higher standard deductions. Claim it and move on with your life.
Indy, you are usually brilliant, but not this one. I guess for lower income persons you are close, but not for persons who make large NGO donations.
Once you are on a NGO donor list you can’t get off. I still get requests mailed to my mother who died in 1991. One of my criteria for selecting NGOs is how few mailings they send!
I don’t know how many people will be served best with increased deductible, but there are many who deduct a lot more. Clumping often makes sense. For example, one of your favorites needs a million dollars to build a new homeless shelter. A big donation that year makes a lot of sense for you and the NGO, then go back to the smaller amount, or don’t.
You are incorrect about NGOs spending their income each year. Many (most) accumulate huge assets. If you look at their annual budget it is “zero’ed out, but if you look close, they do it by funky book-keeping, foundations etc. . Look at Nature conservancy!
Also, there is one way to minimize tax with donations. For those with IRA RMDs, stock donated out of the IRA is not counted as income!
I usually have one or two big donations I make per year and several small ones throughout the year. I’m planning on prepaying the big donations every two years (so $700 in Jan and $700 in December instead of $700 every January), maximizing small donations in deduction years, and making smaller contributions in non-itemizing years. Don’t see any reason why this wouldn’t work
Wolf,
There’s no reason it won’t “work,” as I explain in the post it certainly will “work,” but what is the advantage of doing this? What do you think you’re getting from the $700 in additional contributions every two years?
—Indy
Suppose you have $30,000 of itemized deductions (SALT, Charity, Interest) of which about $8,000 will be disallowed due to the SALT cap. $8,000 of these deductions relates to charity.
For 2018, my itemized deductions would only be $23,000, below the standard deduction for MFJ. If I double up on most of my charity every other year, I would be spending $15,000 in charity for the deduction year (say 2019) for a total itemized deduction of $31,000 (or $9,000 over the SD).
This obviously only works for people who give a fair amount of charity and are able/willing to space donations for January and December but it’s still obviously better than completely forgoing the extra $9,000 of deductions.
Wolf,
Yes, that’s right. In your first comment you said $700, not $7,000, which is what I was responding to.
—Indy
You’re a pretty smart guy, Indy, but I have to agree that you have missed the mark on this one. Will charitable clumping benefit the majority of people — no, probably not. Will it benefit some — yes, quite a bit. Imagine a couple making $200,000 lives in a state with no state income tax, like Texas. Further suppose that they choose to rent a nice apartment, rather than own a home. And then suppose they are tithing $20,000 per year to their church. If they use charitable clumping and donate $40,000 in one year to a Donor Advised Fund (which they can then doll out to their church in the same $20,000 annual chunks), they will have $40,000 in itemized deductions the first year, and take the $24,000 standard deduction the second year (for $64,000 in total deductions). On the other hand, if they give the $20,000 per year, all they would take would be the $24,000 standard deduction each year (for a total of $48,000 in total deductions). That’s $12,000 less in deductions, which for someone in the 24% marginal bracket would be almost $3,000 in tax savings.
Let’s say I want to contribute $20,000 over the next two years. If I donate $10,000 each year, I get no tax benefit at all (setting aside for the moment the matter of other deductions, which could change the specific dollars but not the overall advantage). If I donate $20,000 this year and $0 next year, I get an $8,000 benefit this year, which amounts to about $2,000 in tax savings for someone paying 25% in taxes (or whatever it is for whatever rate a person pays). I think it can work for lots of people who contribute more than $6,000 per year.
And the recipients are not really affected in one way or another. Say I do it this way:
January 2018 – $10,000
December 2018 – $10,000
January 2020 – $12,000 (supposing my income has gone up)
December 2020 – $12,000
For the charities the contributions all come 11-13 months apart – not a big feast or famine rhythm at all.
We do it. It saves money.
You can invest the money (DAF) and dole it out periodically.
If you have stock options/grants or a large bonus it can be a good choice. Pushing you down in tax brackets = good
40k to charity every 2 years and take standard deduction the other. We pay monthly and then lump sum the next year in Dec so it hits same tax year.
Even if it only saves us ~$3k in taxes… It’s free money!
Guess we’re that minority you’re talking about!
You performed an excellent job, and I appreciate all you did! Everyone should be given the opportunity to pursue their educational ambitions, regardless of their financial situation. I was lucky enough to attend a private school, which helped me get a job as a freelance academic writer after graduation. The good thing about my life has been that everything that has happened has been a wonderful learning experience.