By Greg Hart, CFP®
Giving to worthy organizations is a top priority for many people. The tax break that went along with their generous gesture was just an added bonus! Unfortunately, the 2017 Tax Cuts and Jobs Act, with its higher standard deduction, causes many people to lose out on the tax benefits associated with charitable giving.
But don’t be discouraged! You can still receive tax benefits for your charitable giving. How? By setting up and giving through a Donor-Advised Fund.
How The Tax Cuts and Jobs Act (TCJA) Affects 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 in the past few years since the TCJA went into effect in 2017 as you have previously. Basically, you only get a tax benefit for a fifth of your charitable giving.
What Is a Donor-Advised Fund?
This is 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 sit there until you are ready to give. Unlike a savings account, though, 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 are 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 are still able to guide, request, and recommend where the money goes. You get to name your DAF account, advisors, successors, and beneficiaries, and the holder of the DAF makes the ultimate decision on where the funds go. If you’re worried about letting go of having control of your money, know that most DAF holders will honor donor wishes as long as the recommendation complies with legal and tax requirements and grant-making policies.
Tax Benefits of a Donor-Advised Fund
DAFs offer several tax benefits. First, you get to take an immediate income tax 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 $10,000 and put it in a DAF when it’s worth $20,000, you get to deduct $20,000 of charitable giving without paying taxes on the $10,000 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 60% 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 assume all your spending numbers will be the same for last year and this year. The 2021 standard deduction for a married couple filing jointly is $25,100, and for 2022, it’s $25,900. If you continue to give and itemize as usual, then you will have itemized deductions of $26,000 each year. That means you only receive a tax benefit for $900 of your giving in 2021 and $100 in 2022 ($26,000 itemized minus the standard deduction) and your total deductions over the two years are $52,000.
Now, instead imagine that you opened a donor-advised fund in 2021 and contributed $20,000 to it to cover your charitable giving for 2021 and 2022. In 2021, you will have itemized deductions of $36,000. Then in 2022, you can simply take the standard deduction since you have no charitable giving to report. Your total deductions over the two years will be $61,900.
By utilizing a donor-advised fund, you end up with $9,900 more in deductions over the course of two years. If you are in the 24% tax bracket, that’s a tax savings of almost $2,500. If you donate appreciated securities to the DAF, your tax savings will be even greater because you will not face capital gains tax on the disposal of the assets.
Are You Ready to Save Money With a Donor-Advised Fund?
Don’t let tax laws keep you from donating to charities and organizations you care about. Even with the new higher standard deductions, donor-advised funds make it possible to continue receiving a tax benefit for charitable giving. If you want to learn more about how a donor-advised fund can save you money on taxes so you can continue to give generously, Haddon Wealth Management is here to help. Call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, an independent, fee-only registered investment advisory (RIA) firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856)-888-1744 to begin a discussion.