We have a day dedicated to giving thanks. Black Friday and Small Business Saturday best known for special shopping deals, followed by Giving Tuesday the day after Thanksgiving, which rolls out the red carpet for the giving season. With a full belly and a shopping cart filled with great deals, nothing is more rewarding than helping those that are less fortunate.
But what if giving can perhaps offer something more? There is an exceptional beauty with charitable giving, especially if done in a manner that potentially reduces your tax liability. Not only will you get the heartfelt satisfaction of doing a good deed, but you may potentially collect several financial benefits, including:
- current income tax deductions
- possible capital gain avoidance
- potential lower future estate tax.
Most people associate charitable planning strategies with complex ideas for the super-wealthy, but it doesn’t have to be the case. There are some planning opportunities for everyday people who like the idea of reducing taxes and having more to give.
While donor-advised funds have been around since the 1930s; it wasn’t until just five years ago that they became known as the fastest-growing charitable giving vehicles in the United States. According to the 2019 donor-advised Fund Report prepared by the National Philanthropic Trust, donor-advised funds held $121.42 billion in assets.
What is a Donor-Advised Fund?
In the simplest terms, donor-advised funds are charitable investment accounts created for the sole purpose of supporting charitable organizations. They allow investors to contribute cash, securities, or other assets for an immediate tax deduction while allowing those funds to remain invested for tax-free growth. Eventually, at the donor’s advice, assets are passed on to the charity of choice.
Taking an allowable tax deduction has become more difficult with the current standard deduction of $12,400 for singles and 24,800 for married couples filing jointly. You will need sizable itemized deductions to come out ahead. If itemizing doesn’t work for you on a year over year basis, you could consider the bunching strategy. Double up on your charitable contributions in specific years, which could help you reach the itemizing threshold.
Even if you don’t itemize, a donor-advised fund may still be a good giving option if you have non-cash assets, such as non-publicly traded stock or highly appreciated assets. Many smaller charities might not have the resources to manage such donations. Contributing the investment to a donor-advised fund allows the fund to sell the asset and the money sent to charity with little to no hassle for you.
Be aware that there is an annual deduction limit; under current tax laws, the limit is 30% percent of your adjusted gross income if you donate appreciated assets. The limit is 60% for cash contributions. If you make a larger donation, you can carry forward the deduction over the next five years.
Donor-Advised Funds Offer a Lot of Flexibility With Minimal Costs.
Every donor-advised fund has its own rules and requirements. You should review your options and understand the requirements of a fund before making your contribution. You can generally open an account with as little as $5,000, and future contributions could be even lower than that.
Even though you earn your tax benefits the year you contribute, you are not obligated to pick a specific charity at that time. For those people who would like to accumulate a more considerable sum of money, or for those running out of time to research picking a charity yet want to take the charitable deduction for this year, the donor-advised fund is undoubtedly something to consider. Keep in mind that even though no tax rules require it; some donor-advised fund providers have their policies that mandate regular giving.
Unlike the private foundation, any potential growth inside of the donor-advised fund is entirely tax-free. The custodian will also handle administrative tasks such as record-keeping. As the saying goes, there is no free lunch. There is a cost for convenience. You will be charged fees by the donor-advised fund, which can include administrative and investment expenses. While expenses typically are low, you should inquire with the fund company or charity sponsoring the donor-advised fund.
Donor-Advised Funds Are Not For Everyone.
It is essential to understand that contributions are irrevocable gifts, meaning you cannot change your mind and take the money back. You are giving up ownership of the assets that you are putting into the fund. You only retain control over the investment activity and are awarded the ability to advise how and when the assets are distributed to charities. Some donor-advised funds are more restrictive than others regarding what types of charities money can be distributed to. You should do a little homework and make sure the idea of the donor-advised funds matches your own.
With the attractive tax perks coupled with a relatively hassle-free giving experience, it’s easy to see why donor-advised funds experienced tremendous growth over the past decade. If this article sparked your charitable interest and has you asking what if charitable giving can offer more, consider donor-advised funds. Understand tax laws and regulations surrounding donor-advised funds are complex. You should contact an investment and tax professional when considering charitable planning strategies. If you would like more information regarding charitable planning, you can contact River City Wealth Management at info@RiverCityWealth.com or (904) 374-9098.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Advisory Services Network, LLC does not provide tax advice. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.