Getting the Most From Charitable Giving With Donor Advised Funds

I have long been a fan of Donor Advised Funds.  This article by Wade Pfau talks about some of the benefits.  If you are interested in finding our more, just give me a call (970-682-4875) or send me an email at steve@purposefulfinancialplanning.com .

Steve

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Charitable giving is an important part of life for many Americans, and recent current events requiring an immediate response have served as an impetus for generating new charitable contributions quickly and without hesitation. With some advanced planning, these contributions could potentially be made with much greater tax benefit, and understanding how this is possible should help to facilitate even greater contributions to charity.

It is important to recognize that for those with appreciated shares in their taxable accounts, it can be much more effective from a tax perspective to donate appreciated shares rather than cash . The tax savings could then be leveraged to provide an even larger gift, if desired.

For instance, consider an individual wishing to donate $10,000. By donating cash, and when itemizing deductions, this contribution reduces taxable income by $10,000.

via Getting the Most From Charitable Giving With Donor Advised Funds.

Five Tax Advantages of Donor-Advised Funds

There are five instances where a donor advised fund can serve as a tax reduction tool. However, before we delve into those specifics, let’s provide a clear definition:

What is a Donor Advised Fund?

A donor advised fund (DAF) is a charitable giving tool that enables donors to manage their charitable donations in simple, tax-smart and meaningful ways. Donors can enjoy the best tax advantages available, make grants on their own flexible time table and build their enduring charitable legacy.

How Can a Donor Advised Fund (DAF) Reduce Taxes?

Due to their structure, donor advised funds provide explicit tax reduction opportunities in the following ways:

1. Income Tax Deduction: The donor receives an immediate tax deduction in the year they contribute to their DAF. Since a Donor Advised Fund is a public charity, contributions made to  Donor Advised Funds immediately qualify for maximum income tax benefits. The IRS does mandate annual limitations, depending upon the donors adjusted gross income (AGI):

– Deduction for cash – up to 50 % of AGI.

– Deduction for securities and other appreciated assets – up to 30 % of AGI.

– There is a five-year carry-forward for unused deductions.

2. Capital Gains Tax Avoidance: The donor will incur no capital gains tax on gifts of appreciated assets (i.e. securities, real estate, other illiquid assets)

3. Estate Tax Avoidance: The DAF will not be subject to estate taxes.

4. Tax-Free Investment Appreciation: The investments in the DAF appreciate tax-free, providing the donor additional funds that they can use for charitable gain.

5. Alternative Minimum Tax (AMT) Reduction: If the donor’s income is subject to alternative minimum tax (AMT), the contribution to their donor advised fund will reduce their AMT impact.

Other Tax Considerations

In contrast to gifts made to a private foundation, donors can deduct the full market value of certain contributed assets, subject to the AGI limitations listed above. These assets include:

• Closely held stock (C-corp or S-corp)
• Real estate