By Jason Epps, CFP®, CRPC®
Giving back is a great way to use your money. You could always buy a bigger TV or some designer clothes, but that doesn’t add value to the world and to your community like giving back does. Making charitable donations is rewarded with more than just gratitude from those receiving it; you can potentially save money on your taxes while helping those in need. A donor-advised fund can be the perfect vehicle for accomplishing your charitable giving goals because of its tax benefits, which means you get to donate even more (or put more toward your personal financial goals).
Charitable Giving Under The Tax Cuts and Jobs Act (TCJA)
If you’re charitably inclined, you’re probably used to itemizing your deductions. However, with the increased standard deduction, you may not have received as much of a tax benefit for your giving in the past few years since the TCJA went into effect in 2017. Put another way, your benefit for giving to charity has now been reduced by more than 30%. (1)
What Is a Donor-Advised Fund?
This is why donor-advised funds (DAF) are gaining in popularity. A DAF acts as a philanthropic savings account. You contribute for the purpose of giving to charity and manage the funds until you are ready to give. Unlike most traditional savings or investment accounts, 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 a 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 can 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 releasing control of your money, know that most DAF custodians 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
While I don’t recommend charitable giving just to get a tax deduction, if you are going to give, you might as well maximize the tax benefits. DAFs are one way to do this. 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 cash contributions, 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. (2)
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. (3)
How Are Donor-Advised Funds Used?
Let’s assume all your spending numbers will be the same for the years 2022 and 2023. The 2022 standard deduction for a married couple filing jointly is $25,900, (4) and for now we’ll assume it stays the same for 2023. 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 $100 of your giving in both 2022 and 2023 ($26,000 itemized minus the standard deduction) and your total deductions over the two years are $52,000.
Now, instead imagine that you open a donor-advised fund in 2022 and contribute $20,000 to it to cover your charitable giving for 2022 and 2023. In 2022, you will have itemized deductions of $36,000. Then in 2023 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 32% tax bracket, that’s a tax savings of close to $3,000. If you donate appreciated securities to the DAF, your tax savings will be even greater because you will avoid capital gains tax on the disposal of the assets.
DAFs often make sense when your income is way up for a single year. Here are some reasons why this may be the case…
- Severance payout
- Sold a business
- Retired and got paid out for vacation time
- Received an unusually high bonus
Are You Ready to Save Money With a Donor-Advised Fund?
Don’t let tax laws get in the way of your charitable giving! Even with the new higher standard deductions, donor-advised funds make it possible to continue receiving a tax benefit for giving generously to causes you care about.
We at KFA Private Wealth Group would love to partner with you to help impact our world for the better. We strive to help clients like you maximize their wealth to get the most out of life—and your giving is a critical piece of that puzzle. Discover, design, and live the life you want by aligning your finances with your vision and values. If you want to see if a DAF is the right fit for your goals, email jepps@kfapwg.com or call 571-386-2022 to schedule an appointment.
About Jason
Jason Epps is vice president and private wealth advisor at KFA Private Wealth Group, a registered independent advisory firm founded on the premise of providing sound financial and investment advice. With over 15 years of experience, Jason possesses the unique knowledge and expertise necessary to provide his clients with the most applicable and beneficial financial guidance that helps them find confidence in their financial future. Jason is a CERTIFIED FINANCIAL PLANNER™ practitioner and a Chartered Retirement Planning Counselor℠, CRPC®, and believes that a financial plan is only as strong as the advisor’s understanding of the core values and beliefs of each client. He serves a diverse range of clients, from young accumulators to pre-retirees and retirees, including business owners and professionals in a variety of fields. Jason is passionate about giving back to his community and volunteers with various organizations in the D.C. metro area. He also has coached youth travel and AAU basketball since 2009. When he’s not working, you can find Jason spending time with friends and family, traveling, trying out new restaurants, and cheering on local D.C. sports teams. To learn more about Jason, connect with him on LinkedIn.
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(1) https://www.taxpolicycenter.org/briefing-book/how-did-tcja-affect-incentives-charitable-giving
(2) https://www.schwabcharitable.org/non-cash-assets/public-traded-securities
(4) https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022
