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Could A Donor-Advised Fund Save You Money On Taxes?
By Sean Condon, CFP®
Pay less tax while giving more to charities with a donor-advised fund
This last tax season was full of surprises. Thanks to the Tax Cuts and Jobs Act, most people went into it having no idea what the end result would be. How did it turn out for you? Did you end up taking the standard deduction when you usually itemize? If so, were you able to get credit for all of your charitable giving?
One of the areas where many people were affected with the new Tax Cuts & Jobs Act was charitable giving. If you are charitably inclined, you are probably used to itemizing your deductions. However, with the increased standard deduction and the limit on deductions for state and local taxes, you may not have received as much of a tax benefit for your giving as you have previously.
How The Tax Cuts And Jobs Act Affects Charitable Giving
Here’s an example. Let’s assume that for both 2017 and 2018 you and your spouse paid:
- $8,000 in state and local taxes
- $7,000 in property taxes
- $6,000 in mortgage interest
- $10,000 in charitable gifts
For 2017, your itemized deductions would total $31,000, which is $18,300 more than the standard deduction of $12,700 for a married couple.
However, under the new law, in 2018 you could only deduct up to $10,000 of the state, local, and property taxes you paid. This means your itemized deductions would only total $26,000. The new standard deduction for a married couple is $24,000, so your itemized deduction is only $2,000 more than what you get to deduct anyway. Basically, you only get a tax benefit ($2,000 deduction) for a fifth of your charitable giving ($10,000).
What Is A Donor-Advised Fund?
This new limit on property and state tax deductions is one of the reasons why donor-advised funds (DAF) are gaining popularity. A DAF acts as a philanthropic savings account. You put money into it for the purpose of giving to charity and let it accumulate until you are ready to make your donation. However, unlike a savings account, all contributions are irrevocable. Once you put an asset into a DAF, you can’t take it back.
Because you can’t take back your contributions, they are considered complete charitable gifts and immediately tax-deductible. You can take the tax deduction right away even if you wait several years to pass the money on to charity. Though you don’t technically retain ownership when you put money or assets into a DAF, you still retain control. You get to name your DAF account, advisors, successors, and beneficiaries.
What Are the Tax Benefits Of A Donor-Advised Fund?
DAFs offer several tax benefits. First, you get to take an immediate deduction when you contribute, even if the money has yet to be given to the charity of your choice. Any limit to the deduction you’re allowed to take depends on what kind of assets you contribute to the DAF.
Publicly traded securities are a popular asset to contribute to a DAF. This is because you can avoid paying long-term capital gains taxes and still deduct the fair market value of the securities (if held over a year). If you buy a security at $100 and put it in a DAF when it’s worth $200, you get to deduct $200 of charitable giving without paying taxes on the $100 in gains.
Contributions of long-term capital gain property, like appreciated securities, can be deducted up to 30% of adjusted gross income (AGI). For all other contributions, including cash, you can deduct up to 50% of your AGI. If your contributions exceed your deductible limit, you can carry them forward to the next tax year.
Also, all contributions can be invested within the DAF to grow tax-free. Once assets are in a DAF, they belong to a charity and are therefore exempt from taxes.
How Are Donor-Advised Funds Used?
Let’s return to our previous example and assume all your spending numbers will be the same for the years 2019 and 2020. The 2019 standard deduction for a married couple is $24,000 and we will assume it stays the same for 2020. If you continue to give $10,000 to charity a year and itemize as usual, then you will have itemized deductions of $26,000 each year. That means you only receive a tax benefit for $1,600 of your giving each year and your total deductions over the two years are $52,000.
Assume, instead, that you open a donor-advised fund in 2019 and contribute $20,000 to it to cover your charitable giving for 2019 and 2020. In 2019, you will have itemized deductions of $36,000. Then, in 2020, you can simply take the standard deduction since you have no charitable giving to report. Your total deductions over the two years will be $60,400.
By utilizing a donor-advised fund, you end up with $8,400 more in deductions over the course of two years. If you are in the 35% tax bracket, that’s a tax savings of nearly $3,000, money which can be put toward the causes you believe in. And if you donate appreciated securities to the DAF and avoid your embedded capital gains, your tax savings will be even greater.
How a Donor-Advised Fund May Work for You
Donor-advised funds make it possible to continue receiving a tax benefit for charitable giving even with the new higher standard deductions. If you are a generous giver and want to learn more about how a donor-advised fund can save you money on taxes, call (844) 377-4963 or email email@example.com for a complimentary consultation. You can also book an appointment online here.