Charitable giving has solidified its place among the top tax planning strategies, allowing donors to give to a good cause while receiving a significant tax deduction in return for their generosity. The higher standard deduction set in place by the Tax Cuts and Jobs Act will result in fewer taxpayers seeing a benefit from itemizing their deductions, leading many to question the extent to which charitable donations will impact their taxes.
As we approach the season of giving, you may be considering a donation to your favorite nonprofit organization. Have no fear, donor-advised funds (DAFs) provide a way to maximize your charitable gift and still receive some very attractive tax benefits.
What is a DAF?
A donor-advised fund (DAF) serves as a type of charitable investment account. The account itself is a 501(c)(3), therefore you receive a charitable deduction when you contribute funds to the account. When you transfer money to a donor-advised fund account rather than giving directly to the charity, your donation can be invested and grow tax-free until being granted to a 501(c)(3) nonprofit — effectively maximizing the amount of money the organization receives. It’s a win-win for both donors and the charity.
In addition to helping charities, there are several reasons why DAFs may be a tax strategy worth considering.
It May Still be Beneficial to Itemize
The Tax Cuts and Jobs Act increased the standard deduction from $6,350 to $12,200 for single filers and from $12,700 to $24,400 for married-filing-jointly taxpayers for 2019. That means that fewer people are likely to benefit from itemizing deductions this year, including charitable donations. However, DAF accounts allow donors to group multiple years’ worth of gifts into a single year, helping donors see the tax benefit of charitable donations regardless of the increased standard deduction. By lumping together multiple years’ worth of giving into a single donation to a DAF, taxpayers can take advantage of the larger, single-year gift while distributing that money to the charity over time.
Reduce the Burden of High-Income Years
On a similar note, the ability to group multiple years’ worth of giving can also help alleviate your tax burden in the case of a high-income event. If you sold a business or received a sizeable bonus at work, you can make a charitable contribution to your DAF and take the immediate tax deduction to lower your tax burden. Since you choose when to recommend grants (or distribute them to the charities of your choice), you can then fund your charity over several years with that single lump sum donation.
Reduce Capital Gains
If you have strong investment positions with significant capital gains, it may be a smart idea to donate your appreciated assets to a DAF. For example, if you donate appreciated stock to a DAF, you will receive a charitable deduction equal to the fair market value of that stock, and you will not be required to pay capital gains tax. Rather than donating the cash you receive after liquidating assets (which is subject to capital gains), the nonprofit gets the full value of the appreciated assets, and you as the donor would pay less in taxes.
Increase Your Donation Impact
As mentioned above, DAFs are similar to an investment account for your donation dollars. The funds in DAFs can be invested before they are granted out, allowing for market growth to increase your overall donation — tax-free. This is a powerful way to take advantage of immediate tax deductions while maximizing the impact of your charitable legacy.
If you want to learn more about how a donor-advised fund can benefit your charitable gifting strategy, please reach out to CRI.