By Eric Chetwood, CFP®
When you make a charitable contribution, your main goal is to support organizations you’re passionate about and to benefit those in need. It used to be that a nice tax break was just an added perk. Unfortunately, the Tax Cuts and Jobs Act, with its higher standard deduction, causes many people to lose out on the tax benefits associated with charitable giving.
But don’t be discouraged! You can still receive tax benefits for your charitable giving. How? Enter donor-advised funds.
How The Tax Cuts And Jobs Act (TCJA) Affects Charitable Giving
If you are charitably inclined, you are probably used to itemizing your deductions. However, with the increased standard deduction and the limit on deductions for state and local taxes, you may have not received as much of a tax benefit for your giving last year as you have previously.
Let me show you an example. Let’s assume that for both 2017 (pre-TCJA) and 2018 (post-TCJA) you and your spouse paid:
- $8,000 in state and local taxes
- $7,000 in property taxes
- $6,000 in mortgage interest
- $10,000 in charitable gifts
For 2017, your itemized deductions would total $31,000, which is $18,300 more than the standard deduction of $12,700 for a married couple.
However, for 2018, your itemized deductions would only total $26,000 because you can only deduct up to $10,000 of the state and local taxes you pay under the new law. Also, the new standard deduction for a married couple was $24,000 for 2018, so your itemized deduction only totaled $2,000 more. Basically, you only get a tax benefit for a fifth of your charitable giving.
What Is A Donor-Advised Fund?
This is why donor-advised funds (DAF) are gaining popularity. A DAF acts as a philanthropic savings account. You put money into it for the purpose of giving to charity and let it sit there until you are ready to give. Unlike a savings account, though, all contributions are irrevocable. Once you put an asset into a DAF, you can’t take it back.
Because you can’t take back your contributions, they are considered complete charitable gifts and immediately tax-deductible. You can take the tax deduction right away even if you wait several years to pass the money on to charity. Though you don’t technically retain ownership when you put money or assets into a DAF, you are still able to guide, request, and recommend where the money goes. You get to name your DAF account, advisors, successors, and beneficiaries, and the holder of the DAF makes the ultimate decision on where the funds go. If you’re worried about letting control of your money go, know that most DAF holders will honor donor wishes as long as the recommendation complies with legal and tax requirements and grant-making policies.
Tax Benefits Of A Donor-Advised Fund
DAFs offer several tax benefits. First, you get to take an immediate deduction when you contribute, even if the money has yet to be given to the charity of your choice. Any limit to the deduction you’re allowed to take depends on what kind of assets you contribute to the DAF.
Publicly traded securities are a popular asset to contribute to a DAF. This is because you can avoid paying long-term capital gains taxes and still deduct the fair market value of the securities (if held over a year). If you buy a security at $100 and put it in a DAF when it’s worth $200, you get to deduct $200 of charitable giving without paying taxes on the $100 in gains.
Contributions of long-term capital gain property, like appreciated securities, can be deducted up to 30% of adjusted gross income (AGI). For all other contributions, including cash, you can deduct up to 60% of your AGI. If your contributions exceed your deductible limit, you can carry them forward to the next tax year.
Also, all contributions can be invested within the DAF to grow tax-free. Once assets are in a DAF, they belong to a charity and are therefore exempt from taxes.
How Are Donor-Advised Funds Used?
Let’s return to our previous example and assume all your spending numbers will be the same for the years 2021 and 2022. The 2021 standard deduction for a married couple filing jointly is $25,100, and let’s assume it will be the same for 2022. If you continue to give and itemize as usual, then you will have itemized deductions of $26,000 each year. That means you only receive a tax benefit for $900 of your giving in 2021 and 2022 ($26,000 itemized minus the $25,100 standard deduction) and your total deductions over the two years are $52,000.
Now, instead imagine that you open a donor-advised fund in 2021 and contribute $20,000 to it to cover your charitable giving for 2021 and 2022. In 2021, you will have itemized deductions of $36,000. Then, in 2022, you can simply take the standard deduction since you have no charitable giving to report. Your total deductions over the two years will be $61,100.
By utilizing a donor-advised fund, you end up with $9,100 more in deductions over the course of two years. If you are in the 24% tax bracket, that’s a tax savings of over $2,000. If you donate appreciated securities to the DAF, your tax savings will be even greater because you will not face capital gains tax on the disposal of the assets.
Are You Ready To Save Money With A Donor-Advised Fund?
Don’t let tax laws keep you from donating to charities and organizations you care about. Even with the new higher standard deductions, donor-advised funds make it possible to continue receiving a tax benefit for charitable giving. If you want to learn more about how a donor-advised fund can save you money on taxes so you can continue to give generously, Adams Chetwood Wealth Management is here to help. Schedule a complimentary introductory meeting online or reach out to us at firstname.lastname@example.org or (919) 287-5660.
Eric Chetwood is managing partner and CERTIFIED FINANCIAL PLANNER® (CFP®) at Adams Chetwood Wealth Management Group, a faith-based Registered Investment Advisory (RIA) firm located in Durham, North Carolina. Eric graduated from the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill in 2003 with a bachelor’s degree in business administration and has been on the Adams Chetwood team for over 15 years. Eric spends his days helping clients with comprehensive financial planning and portfolio construction and helping them navigate the opportunities and challenges of each stage of life. Away from the office, Eric enjoys effecting change in the local community. He was chosen to participate in the 2007 Leadership Durham program and the 2009 Leadership Triangle program. Currently, Eric serves as a directional Elder at the Summit Church. He also serves on the board of directors for the NC Study Center at UNC-CH and previously served on the board of Samaritan Health Center, an organization that provides medical care to uninsured and low-income families in Durham. He and his wife, Allison, have two sons, and are passionate about adoption advocacy as well as leveraging their gifts and resources to alleviate physical and spiritual poverty through microfinance and social businesses. To learn more about Eric, connect with him on LinkedIn.