Charitable Giving Under New Tax Laws
No matter how the 2017 Tax Cuts and Jobs Act (TCJA) may alter your tax planning, we believe one thing will remain: With or without a tax write-off, many Americans still want to give to charity. After all, financial incentives aren’t usually the main motivation. We give to support the causes we cherish. We give because we’re grateful for the good fortune we’ve enjoyed. We give because it elevates us too. Good giving feels great – for donor and recipient alike.
That said, a tax break can feel good too, and it may help you give more. Enter the donor-advised fund (DAF), a potential tool for continuing to give meaningfully and tax-efficiently under the new tax law. Donor-advised funds are not new; they’ve been around since the 1930s. But, they’ve garnered more attention as a potentially appropriate tax-planning tool under the TCJA.
What’s Changed About Charitable Giving?
To be clear, the TCJA has not eliminated the charitable deduction. You can still take it when you itemize your deductions. But the law has limited or eliminated several other itemized deductions, and it’s roughly doubled the standard deduction (now $12,000 for single filers, and $24,000 for joint filers). With these changes, there will be far fewer times that it will make sense to itemize your deductions instead of just taking the now-higher standard allowance.
This introduces a new incentive to consider batching your deductible expenses, so they can periodically “count” toward reducing your taxes due – at least in the years you’ve got enough itemized deductions to exceed your standard deduction.
For example, if you usually donate $2,500 annually to charity, you could instead donate $25,000 once each decade. Combined with other deductibles, you might then be able to take a nice tax write-off that year, which may generate (or be generated by) other tax-planning possibilities.
What Can a Donor-Advised Fund Do For You?
Donating through a DAF may be a great option if you want to make a relatively sizeable donation for tax-planning or other purposes. It allows you to retain control over which organizations receive the donations, but you’re not required to allocate all of the money at one time. Keeping track of your donations is greatly simplified as well.
Here’s how they work:
- Make a sizeable donation to a DAF.
Donating to a DAF, which acts like a “charitable bank,” is one way to batch up your deductions for tax-wise giving. But remember: DAF contributions are irrevocable. You cannot change your mind and later reclaim the funds.
- Deduct the full amount in the year you fund the DAF.
DAFs are established by nonprofit sponsoring organizations, so your entire contribution is available for the maximum allowable deduction in the year you make it. Plus, once you’ve funded a DAF, the sponsor typically invests the assets, and any returns they earn are tax-free. This can give your initial donation more giving-power over time.
- Participate in granting DAF assets to your charities of choice.
Over time, and as the name “donor-advised fund” suggests, you get to advise the DAF’s sponsoring organization on when to grant assets, and where those grants will go.
- Take advantage of the simplified tracking of charitable donations.
At tax time, your DAF will have one consolidated receipt for you to share with your tax preparer.
Don’t Donate Cash!
You may be accustomed to simply writing a check when your favorite charity asks for a donation. However, donating cash is not the most tax-efficient approach. Instead, you can donate appreciated stocks in kind (without selling them first) directly to your DAF, and then donate to your favorite charities from your DAF. This is advantageous for a few reasons: Instead of paying taxes when you liquidate stock, you get a tax deduction for donating the stock; your favorite charities get much-needed funds. Everybody wins (except the IRS).
How We Can Help
We regularly incorporate Donor-Advised Funds into our clients’ financial plans. This includes modeling and discussing the many benefits of gifting, handling the logistical aspects of creating the account, choosing which stocks to transfer, and even directing donations based on your guidance. If you are interested in Donor-Advised Funds, contact us today by clicking here.
Opes Advisors is not a tax or accounting firm. Please consult your tax advisor for details specific to your situation.