There are many ways to donate to charity, however, some methods are more effective than others. Often the easiest ways of donating are the least beneficial for the donor from a tax standpoint. Donating cash, using a credit card online, or writing a check, while simple to do, are not the most tax-efficient methods of giving since all involve donating money that has already been taxed. A Donor Advised Fund, on the other hand, incorporates the tax benefits of donating appreciated assets with the donor’s control over deciding which organizations receive their charitable grants, when those grants take place and in what amounts.
Now regarded as the fastest-growing charitable giving vehicle in the United States, a Donor Advised Fund is like a charitable investment account, used for the sole purpose of supporting charitable organizations you care about. When you contribute cash, stocks, or non-publicly traded assets such as real estate, private business interests and private company stock to a Donor Advised Fund, you are usually eligible to take an immediate tax deduction for the full value of the asset. Once in the Fund, those assets can be sold tax free and reinvested into other investment options that continue to grow tax free until you direct grants to any IRS-qualified public charity.
As an example of the tax benefits, let’s say you invested $20,000 which over the years grew to $100,000. Under normal circumstances, you would sell those investments and pay 15-20% long-term capital gains tax on the $80,000 gain. At a 20% capital gains rate, that could be as much as $16,000! After taxes had been paid, you could donate the remaining $84,000 ($100,000-$16,000) to charity. The amount paid in capital gains taxes significantly reduces the amount available to donate to the charity and reduces the amount you can take as a tax deduction.
With a Donor Advised Fund, you would donate the full $100,000 of appreciated securities. The fund can sell the assets without having to pay capital gains taxes, and you receive the full $100,000 tax deduction in the year the assets are donated. The assets can then be reinvested, and charitable grants distributed to qualified charitable organizations at any time. You are not required to distribute all the assets in the year they are transferred to the fund. In fact, grants can be spread out over many years and passed down to children and grandchildren. A Donor Advised Fund is a great tool for teaching family and loved ones about the benefits of long-term charitable gifting. It is important to note, however, that contributions to a Donor Advised Fund are completely irrevocable, and the requirements for how often grants must be made can vary among different Funds.
Keep in mind also that all charitable tax deductions are still limited to IRS rules. Under the new tax law, individuals can take tax deductions up to 60% of their adjusted gross income (AGI) for cash contributions and up to 30% of their AGI for non-cash assets (investments, property, business assets, etc.). You can contribute more than those amounts into a Donor Advised Fund, but any excess charitable deductions over the 60/30% limits must be carried forward to the next year. Overall, if you itemize your taxes, contributing appreciated assets to a Donor Advised Fund is an excellent way to increase your total itemized deductions in a tax-advantaged way. Even with the new tax law changes, they remain an attractive vehicle for making long-term charitable donations.
Jeff Witz, CFP® and David Zemon welcome readers’ questions. They can be reached at 800-883-8555 or at witz@mediqus.com or zemon@mediqus.com.
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Please consult your tax advisor regarding any questions you may have with respect to your personal tax liability.
