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.
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.