I doubt many people would say that getting a deduction on their income taxes is their main motivation for charitable giving.
It’s more likely they’ve been inspired to support a cause they believe in or an organization they respect — a children’s hospital, veterans group or maybe research into a medical condition. Some people just have a philanthropic mindset.
Still, taxes are an important consideration for many donors, who may have given more to their favorite charities over the years because of the tax deduction they received when itemizing on their income tax returns.
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Getting that charitable tax deduction is tougher now, since the Tax Cuts and Jobs Act of 2017 (TCJA). Because of changes in the law, taxpayers who take the new, doubled standard deduction, instead of itemizing, miss out on the opportunity to write off their charitable contributions.
That loss came as a surprise and disappointment to those who didn’t know about the tax law changes, or hadn’t planned for them, before the end of tax year 2018. But there is a way to get back on track for 2019, 2020 and every tax year through 2025.
For very generous donors, a Donor-Advised Fund (DAF) allows you continue to support your favorite charities, while still receiving charitable tax deductions.
DAFs aren’t new, but they’ve been gaining traction since the passage of the new tax law — and I expect their popularity to grow as more donors catch on to the tax benefits available.
How does a DAF work?
A DAF allows you to make tax-deductible “bunched” charitable contributions to your DAF, in the current tax year, that exceed your standard deduction. Then, in this tax year and/or in future tax years, you “advise” your DAF to grant funds to your favorite charities.
So, if you used to give $10,000 per year to your favorite charities, under the new standard deduction you wouldn’t be able to itemize and enjoy the charitable tax deduction. But let’s say you give $50,000 in the current tax year to your DAF, itemize the entire $50,000 in the current tax year and then don’t put any more into your DAF for the next four tax years.
Instead, in future tax years, you can “advise” your DAF to grant an amount of money to the charities you wish to benefit. And, just as you can advise your DAF to grant money to those charities each tax year, you have the power to advise your DAF to stop granting money, should your favorite charity stray from the straight and narrow. You could then choose another charity to advise your DAF to grant to instead.
It’s just good stewardship.
And you can choose from a wide range of assets to donate to your DAF — not just cash, but securities, real estate and even Bitcoin.
The assets you donate to your DAF grow tax-free, until you choose which qualified nonprofit organization (or organizations) should receive grants from your DAF and when. Even if you spread your gifts over several future tax years, you can claim the charitable tax deduction for the entire amount donated to your DAF in the current tax year.
The amount donated to your DAF (up to 60% of your adjusted gross income), combined with other potential tax deductions, could result in a larger amount than your standard deduction. (In 2019, the standard deduction is $24,400 for married couples filing jointly. For single taxpayers and married individuals filing separately, it’s $12,200. And for heads of households, it’s $18,350.)
You’d get the tax break in the current tax year — or any year you donate to your DAF — and just take the standard deduction in other tax years. Meanwhile, you’d advise your DAF to grant money at a pace that’s comfortable for you, year-by-year.
Advantages of a DAF
Why not just give the entire amount to your charity all in one year?
- For one thing, because a DAF is an investment account, you can continue to grow the money you plan to donate and potentially increase the impact of your giving.
- Also, you haven’t gone "all in” on a charity that you may in the future learn is now misbehaving or has adopted policies that you disagree with. Your DAF’s custodian technically can deny any grant you advise it to make, but in reality, that’s not in the interest of your DAF’s custodian. They want to keep you happy.
- Setting up a DAF is easier and less expensive than establishing a private foundation.
- Your DAF is overseen by a nonprofit arm of your securities custodian. Your investment adviser can manage the investments in your DAF for you.
- You don’t need a team of lawyers, accountants or private foundation staff.
- To add to the convenience, you can get started with far less money than a private foundation requires. (Many DAFs have a $5,000 minimum.)
You may not be establishing a long-term legacy with a DAF, as you might be with a family foundation. Most donors I work with like the DAF approach as a way to give during their lifetime. They aren’t necessarily expecting it to continue into the next generation.
Some families use DAFs to work toward shared charitable goals — without the same costs and complications of setting up a private foundation.
If you missed out on charitable tax deductions in 2018, there’s still time to check out the benefits of a DAF for the current tax year and beyond. Talk to a trusted investment professional about how this alternative approach to charitable giving could work for you and the causes you support.
Kim Franke-Folstad contributed to this report.
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