Utilizing donor-advised funds is a extra superior tax technique that has gotten extra in style lately with the introduction of the Tax Cuts and Jobs Act (TCJA) in February 2020. The TCJA almost doubled the quantity of the usual deduction, which makes it much less advantageous to itemize deductions resembling charitable contributions. For folks with loads 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)(3) charitable group that accepts contributions and customarily funds different charitable organizations. Whereas the idea of a donor-advised fund has been round for almost 100 years, they have been usually 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 sorts of property to the DAF. The precise checklist of property eligible for donation is determined by the brokerage. After you will have contributed, you’ll be able to then make charitable contributions from the stability of your account.

You’ll be able to maximize your charitable tax deductions in a single yr

One frequent purpose that folks arrange donor-advised funds is to maximise their charitable tax deductions in a specific tax yr. To indicate 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 yr. 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 identical 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 complete $40,000 as an itemized deduction, even when they solely use $20,000 to donate to the charity of their alternative. Then in 2021, they’ll donate the remaining $20,000 to their most well-liked charity. They will be unable to deduct any charitable contributions in 2021 however can as an alternative take the raised normal deduction quantity.

You might be able to deduct the complete worth of shares or different investments

Another excuse you would possibly wish to arrange a donor-advised fund is that you just might be able to deduct the complete 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 just bought for $20,000 that at the moment are price $50,000. Many charities, particularly smaller organizations, will not be set as much as settle for donations of shares or different investments. So if you wish to donate that $50,000 to charity, you’ll have to liquidate your shares. It will 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 complete honest market worth of your shares. Then the fund could make the contribution to the charity of your alternative.

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 will not be arrange in such a manner to have the ability to settle for non-cash donations. Whereas the precise checklist of property {that a} donor-advised fund can settle for varies by the agency working the fund, it usually will embrace extra sorts of property than a typical charity.

Why you may not wish to arrange a donor-advised fund

Whereas there are many benefits to organising a donor-advised fund, there are some things that you just would possibly wish to be careful for.

  • It’s positively extra difficult than simply making charitable contributions by yourself. It’s possible you’ll discover that the tax financial savings will not be price the additional problem.
  • On prime of the added layer of complexity, most corporations with DAFs cost administrative charges that may reduce into your price of return.
  • It’s possible you’ll be restricted on the charities which you could donate to. Every donor-advised fund usually can have a listing of eligible charities. So chances are you’ll discover {that a} charity that you just wish to donate to is just not accessible.
  • You additionally lose management over the funds that you just 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 are going to donate the cash as you direct, they aren’t legally required to take action.
  • The cash in a DAF is invested, so it could lose worth. That implies that the quantity you have been hoping to donate could also be lower than you have been anticipating. You additionally usually 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 revenue tax deduction limits for items to donor-advised funds, are 60% of Adjusted Gross Earnings for contributions of money, 30% of AGI for contributions of property that might 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 web site that helps households to journey at no cost / 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 children.



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