Maximizing Your Charitable Deductions with a Donor Advised Fund
A few years ago, Congress passed legislation that changed the standard deduction, and with it, the way many people gave to charities.
As a brief recap, your taxable income is derived by totaling all your adjusted income (AGI) and then subtracting your standard deduction OR itemized deductions (whichever is higher).
Example
Adjusted Gross Income = $100,000
- $12,000 standard deduction (itemized deductions only total $10,000)
———————————————————————————————————————————————
= $88,000 of taxable income
Charitable contributions are one of those itemized deductions. So, if you don’t have enough itemized deductions to increase it over the standard deduction, there is essentially no tax benefit for your donation. One way around this is to simply donate more in one year and less in others.
For example, if you donate $5,000 every year, donate $10,000 one year and $0 the next. But not everyone wants to give lump sums – most people, including myself, prefer to give every year or throughout the year on a regular basis.
This is where a Donor Advised Fund (DAF) comes in. The DAF is itself a charitable organization. So, you can simply give the money in one year to the DAF, take the entire tax deduction that year, and then make grants from the account to your charity over time as you wish.
So, in the example above, let’s say they give $10,000 to their church each year, resulting in $10,000 in itemized deductions, which is less than the greater $12,000 standard deduction. Instead of giving $10,000 in 2021, they give $20,000 in 2021 to the DAF and then give $10,000 to their church in 2021 and 2022 from the DAF account. This allows them to itemize their deductions of $20,000 in 2021 and then take the greater standard deduction in 2022.
A few questions to consider before implementing
(1) Do we have the cash flow or resources to donate more now?
(2) Are we confident that we want to make these gifts? The transfer to the DAF is irrevocable.
(3) Do we have appreciated stock or other assets that we could transfer into the DAF? You can transfer appreciated assets into the DAF and then sell them for no tax consequences.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.