Utilizing donor-advised funds is a extra superior tax technique that has gotten extra well-liked not too long ago with the introduction of the Tax Cuts and Jobs Act (TCJA) in February 2020. The TCJA practically doubled the quantity of the usual deduction, which makes it much less advantageous to itemize deductions similar to charitable contributions. For individuals with quite a lot of charitable contributions, donor-advised funds are one choice to nonetheless get a deduction for charitable contributions.
What’s a donor-advised fund?
A donor-advised fund (DAF) is a registered 501(c)(three) charitable group that accepts contributions and customarily funds different charitable organizations. Whereas the idea of a donor-advised fund has been round for practically 100 years, they had been sometimes solely utilized by the ultra-wealthy. And whereas it’s true that donor-advised funds are nonetheless not going to be helpful for the overwhelming majority of individuals, latest tax regulation modifications have made their use extra prevalent.
You’ll be able to arrange a donor-advised fund with most brokerages, together with Constancy, Vanguard, and Financial institution of America. You’ll be able to donate money, securities, or different varieties of property to the DAF. The precise listing of property eligible for donation will depend on the brokerage. After you have got contributed, you’ll be able to then make charitable contributions from the steadiness of your account.
You’ll be able to maximize your charitable tax deductions in a single 12 months
One widespread cause that folks arrange donor-advised funds is to maximise their charitable tax deductions in a specific tax 12 months. To point out why this may be useful, I’ll use an instance:
Our instance household information their taxes married submitting collectively and has common charitable contributions of $20,000 per 12 months. The usual deduction in 2020 for married submitting collectively is $24,800. As a result of their quantity of charitable deductions is lower than the usual deduction, they could not see any tax profit from their charitable contributions (relying on their quantity of different itemized deductions). In 2021 they once more plan to contribute $20,000 to charitable organizations and once more are unlikely to see any tax profit from doing so.
Now contemplate this similar household now decides to arrange a donor-advised fund in 2020. They’ve more money sitting round in low-interest financial savings or checking account or in a taxable funding account. So that they arrange a donor-advised fund in 2020 and fund it with $40,000 in money, shares, or different property. They’re eligible to take the total $40,000 as an itemized deduction, even when they solely use $20,000 to donate to the charity of their selection. Then in 2021, they will donate the remaining $20,000 to their most well-liked charity. They won’t be able to deduct any charitable contributions in 2021 however can as a substitute take the raised commonplace deduction quantity.
You might be able to deduct the total worth of shares or different investments
Another excuse you may wish to arrange a donor-advised fund is that you simply might be able to deduct the total worth of shares or different investments. Once more, I’ll use an instance to assist illustrate the purpose.
Let’s say that you’ve shares that you simply bought for $20,000 that at the moment are value $50,000. Many charities, particularly smaller organizations, aren’t set as much as settle for donations of shares or different investments. So if you wish to donate that $50,000 to charity, you will have to liquidate your shares. This may imply that you’ll have to pay tax on the proceeds.
With a donor-advised fund, you’ll be able to donate the shares to your fund and deduct the total truthful market worth of your shares. Then the fund could make the contribution to the charity of your selection.
Donate a variety of property
One other profit to organising a donor-advised fund is the flexibility to donate a variety of various courses of property. As we talked about earlier, many charities aren’t arrange in such a manner to have the ability to settle for non-cash donations. Whereas the precise listing of property that a donor-advised fund can settle for varies by the agency working the fund, it typically will embody extra varieties of property than a typical charity.
Why you won’t wish to arrange a donor-advised fund
Whereas there are many benefits to organising a donor-advised fund, there are some things that you simply may wish to be careful for.
It’s undoubtedly extra sophisticated than simply making charitable contributions by yourself. You could discover that the tax financial savings aren’t value the additional problem.
On high of the added layer of complexity, most companies with DAFs cost administrative charges that may reduce into your fee of return.
You could be restricted on the charities which you can donate to. Every donor-advised fund sometimes may have an inventory of eligible charities. So chances are you’ll discover that a charity that you simply wish to donate to shouldn’t be accessible.
You additionally lose management over the funds that you simply donate – the donation to the fund is irrevocable, that means when you’ve donated to the fund you can not get the donation again. Whereas most advisors state that they may donate the cash as you direct, they don’t seem to be legally required to take action.
The cash in a DAF is invested, so it might lose worth. That implies that the quantity you had been hoping to donate could also be lower than you had been anticipating. You additionally sometimes have a restricted vary of investments accessible to your funding, and people funds additionally usually include charges.
It’s additionally vital to remember, the annual earnings tax deduction limits for presents to donor-advised funds, are 60% of Adjusted Gross Earnings for contributions of money, 30% of AGI for contributions of property that may qualify for capital features tax remedy; 50% of AGI for blended contributions of money and non-cash property.
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Dan Miller (42 Posts)
Dan Miller is a contract author and founding father of PointsWithACrew.com, a website that helps households to journey without spending a dime / low cost. His residence base is in Cincinnati, however he tries to journey the world as a lot as doable together with his spouse and 6 youngsters.