What’s all this talk about Donor-Advised Funds? How do they work? What’s the tax advantage? A Donor-Advised Fund, or “charitable checkbook” as many describe it, is a giving vehicle from which donations can be made to 501(c)(3) non-profit organizations. A donor is able to make a single gift and receive an immediate tax receipt for the gift, and then advise on how the funds are to be distributed short-term or in future years to their favorite charities.
The tax law changes in late 2017 were the most disruptive changes to the tax code in more than 30 years. The most impactful changes to personal income tax were the elimination and limitation of most major itemized deductions. Most individual taxpayers are limited to just a few deductions:
- Charitable Contributions
- Mortgage Interest
- Medical Deductions (applicable over 7.5% of Adjusted Gross Income)
- State and Local Tax (SALT) Deduction (limited to $10,000 total income and property tax)
To counteract the limitations and eliminations of many itemized deductions, the new tax law expands the standard deduction (given to all taxpayers regardless of their actual deductions) to $12,000 for individuals and $24,000 for those married filing jointly.
This simply means that fewer people will be itemizing going forward. For those with no mortgage interest or medical deductions, their deductions are really limited – $10,000 SALT deduction and their charitable deductions.
SOLUTION: “Bunching Donations”
As a result, for those who regularly donate to charity, it may make sense to consider utilizing a Donor Advised Fund (DAF). A Donor Advised Fund can be thought of as a “charitable checking account” from which donations can be made to eligible 501(c)(3) organizations. An individual can establish a DAF by making a donation of cash, appreciated securities, or other assets and receiving an immediate tax write off for the full amount. From there, the donor can easily recommend grants from that account to their favorite charities.
In light of the new tax law, DAF’s can also be utilized to make “bunched” donations. “Bunching” donations (contributing two or three years’ worth of donations upfront in a single year) allows donors to break through the itemizing threshold and therefore take advantage of the charitable deduction. The donor can then recommend that donation from the DAF be sent out over a defined time period (for example, one-third of the amount given in year one, one-third in year two, etc.). Therefore, the single lump sum isn’t necessarily used all in the same year but rather spread out to fulfill donor’s charitable goals.
HOW TO GET STARTED:
If you have any questions, or want more information, call Gary Rectenwald at 858-490-8365 or email him at firstname.lastname@example.org.