Tax Planning: Lumping Charitable Contributions

Tax returns filed in 2018 were the first filings that reflected the tax law changes passed by Congress in late 2017.

State and Property Taxes Capped as Itemized Deductions

For many, the most dramatic changes were to the rules for itemized deductions. In prior years, the full amount of state and property taxes was tax deductible. The new laws put a $10,000 cap on the combined amount. The cap cut deductions dramatically for many, particularly Californians who pay high property and state income taxes.

Higher Standard Deduction

Another major change is a much larger standard deduction. Tax filers use the standard deduction if it is higher than their itemized deductions. In 2017, the standard deduction was $6,350 for single filers and $12,700 for joint filers. The new tax law nearly doubled those numbers to $12,000 and $24,000. Filers over 65 receive an extra $1,600 (single) or $2,600 (married filing jointly).

As a result of the new rules, far fewer filers have itemized deductions in excess of the standard deduction. Many are discovering that previously-itemized deductions no longer provide a tax benefit.

How Lumping Charitable Contributions could help

Deduction lumping tries to overcome the higher standard deduction hurdle. By concentrating multiple years of deductions within the same tax year, it’s possible to produce a tax benefit that otherwise would not have happened.

While most deductions have little timing flexibility, taxpayers have more control over charitable giving. Through charitable remainder trusts (CRTs) and donor advised funds, taxpayers can make multiple years of contributions in one year and still maintain control over when charities receive donations.

Example of Lumping Charitable Contributions

In the chart below, a taxpayer lumps five years of donations to qualify the donations as itemized deductions. Had the taxpayer spread donations over five years, the donations would have been useless for tax purposes because itemized deductions would never have exceeded the standard deduction.

We suggest reviewing your past tax returns. If charitable gifting did not result in itemized deductions, then clumping donations in the future may be helpful. Additionally, if you are over 70 ½, you may consider a Qualified Charitable Deduction (QCD), a tax-free transfer from your IRA to the charity.

We are happy to discuss with you and your accountant if you would like to consider charitable strategies for your particular situation.