We’re commonly asked: Is grouping donations a realistic strategy for small donors or is it a strategy for major donors who can afford to make a donation of several thousand dollars in one tax year? Is there a target annual income level that is likely to be able to use this strategy?
The strategy of grouping donations involves consolidating charitable gifts that would normally be paid over multiple years into a single tax year. We believe this strategy will take on new relevance by helping certain donors exceed the higher standard deduction put in place by the Tax Cut and Jobs Act of 2017.
These questions bring up good points about the math of grouping donations. In light of tax reform, it will only make sense for donors who are at or near the tipping point of putting themselves above the standard deduction (i.e., $12,000 for a single filer and $24,000 for married filers). There are many different scenarios for how this might occur.
Take for example, a married couple filling jointly that have $12,000 per year in non-charitable itemized deductions. Suppose their budget allows them to donate $5,000 per year. The optimal grouping strategy would require them to forgo at least two years of donations and make a combined donation in or after the third year. This way, they can benefit from the higher standard deduction in years one and two, while exceeding the standard deduction in year three.
Example One: Married Couple with $12,000 in Itemized Deductions
| Year One | Year Two | Year Three | |
| Standard deduction | $24,000 | $24,000 | $24,000 |
| Itemized deduction | $12,000 | $12,000 | $12,000 |
| Donations | - | - | $15,000
(3 years x $5,000 donations) |
| Total deductions | $24,000 | $24,000 | $27,000
(exceeds the standard deduction) |
For illustrative purposes only.
Now compare this to a couple who have $22,000 per year in non-charitable itemized deductions. Suppose their budget only provides for $500 in donations every year. They could still group their donations, but would need to do so over five years in order to exceed the standard deduction. Smaller donations can be used under the grouping strategy but it may be necessary to extend the time frame or perhaps have higher non-charitable deductions.
Example Two: Married Couple with $22,000 in Itemized Deductions
| Year One | Year Two | Year Three | Year Four | Year Five | |
| Standard deduction | $24,000 | $24,000 | $24,000 | $24,000 | $24,000 |
| Itemized deduction | $22,000 | $22,000 | $22,000 | $22,000 | $22,000 |
| Donations | - | - | - | - | $2,500
(5 years x $500 donations) |
| Total deductions | $24,000 | $24,000 | $24,000 | $24,000 | $24,500
(exceeds the standard deduction) |
For illustrative purposes only.
There are many taxpayers that may still find charitable deductions useful. The table below depicts average deduction amounts for the three largest categories of non-charitable itemized deductions: medical expenses, state/local income taxes, and mortgage interest. A filer with adjusted gross income of $100,000 might have more than $20,000 of non-charitable deductions in any given year. They would have to come up with about $4,000 in donations to exceed the standard deduction, a significant amount for sure, but not impossible when grouping donations over several years.
Average Amounts for the Three Largest Non-Charitable Itemized Deductions Qualified Medical Expenses, State/Local Income Taxes, Mortgage Interest
| Adjusted Gross Income | Qualified Medical Expenses | State/Local Income Taxes | Mortgage Interest |
| Under $50,000 | $8,898 | $1,760 | $6,128 |
| $50,000 to $100,000 | $9,595 | $3,619 | $7,032 |
| $100,000 to $200,000 | $12,580 | $7,259 | $8,945 |
| $200,000 to $500,000 | $25,425 | $17,372 | $12,777 |
| Percent of returns claiming this deduction | 20% | 74% | 73% |
Note: This data is the latest data available from the IRS and is as of 2016. 2017 tax law caps the deduction for state & local taxes at $10,000 and medical expenses are deductible if they exceed 10% of AGI as of 2019.
The sweet spot for using the grouping strategy may be donors in the $50,000 to $200,000 income range. Higher income donors would still be able to deduct their gifts, but they may already have enough itemized deductions to exceed the standard deduction, and therefore have no need to group their donations.
The bottom line is that the grouping strategy depends on both the size of a gift and the other itemized deductions a donor can use. The math works for many different types of donors at different income levels, but certainly, there will be situations where this strategy is not applicable. Your organization can help make charitable giving as smooth as possible by providing this type of guidance and insight to current and potential donors.
Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.
