Key Tax Benefits of Donor-Advised Funds

Giving to others always feels good. It gives you a warm, fuzzy feeling, knowing you've done something good for someone else.

It also can give you some great tax breaks.

Donors understand the benefits of giving. Donor-advised funds have been around since 1931, but in recent years, they're becoming even more popular.

In fact, in 2018 grants stemming from donor-advised funds to qualified charities grew 19 percent. 

Why are donor-advised funds becoming so popular? Keep reading to learn about the tax benefits that come with setting your money aside for charity. 

What Are Donor-Advised Funds? 

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Donor-advised funds are basically investment accounts with a purpose. 

For example, if you have some money you'd like to donate but you don't have a particular charity in mind. You can set up a donor-advised fund, a charitable investment account in which you are in charge of managing and picking the investments. Your then grows tax-free until you recommend the fund send a "grant" to a charitable organization of your choosing. You get an immediate tax deduction while the chairty gets the money at a time and frequency you specify. You can also grant to multiple different charities using your Donor Advised Fund.

Recent changes in the tax laws have made donor-advised funds popular as well. They have become more useful to many taxpayers under the Trump tax plan. This is becuase most people are capped on their state and local tax deduction at $10,000. This means many people who used to itemize their deduction are now standard filers. The Donor Advised Fund allows this taxpayer to group their charitable donations into one year so they can get the full tax deduction in one year and then go back to being a standard filer in the next. Without a Donor Advised Fund many people would get zero tax benefit from their charitable donations. The key feature of the Donor Advised Fund is that even though you donate your money and take the deduction in one year, you choose when to actually make the donation to a charity.

For example, if you add $15,000 to a donor advised fund in 2020, you get the full deduction of $15,000 in 2020 but could then use the fund to donate $5,000 to your favorite charity over the next 3 years. The charity may acutally end of getting even more than $15,000 becuase the money can be invested over those three years.

What are the Tax Benefits for Donor Advised Funds? 

You receive multiple tax benefits when you open a donor-advised fund. 

1. Tax-Free Growth

When you set up a donor-advised fund, all the money in the fund goes to a charitable sponsor. Charities and non-profits do not pay taxes. 

Because the fund belongs to a charity that you choose, all growth is tax-free. Neither the charity nor you have to pay taxes on the growth of the fund. 

As the market grows, so does your donor-advised fund. Investing five-thousand dollars in the fund does not mean your selected charity will receive five-thousand dollars. With market growth, they will receive more. 

So your donation grows, and you do not pay taxes on the growth. 

2. Income Tax Deductions

If you have a good year financially, you might be dreading the upcoming tax season since you will have to pay taxes on your increased income. 

When you make a charitable contribution to a donor-advised fund, you receive an immediate tax deduction. 

So, if you sell your business or a peice of property for a gain, you don't have to hurry to find a worthy charity. You can put it in your donor-advised fund and then watch it grow. You can take your time selecting where the money will eventually go. 

As well, the gain may push you into a higher tax-bracket that you would otherwise never be in, the donor advised fund can be used to push your income back down during that year.

You do have some limitations. For example, you can deduct up to 60 percent of your adjusted gross income for cash. 

3. Capital Gains Elimination or Reduction

You can also fund your donor-advised fund with direct donations of stock or other appreciated assetss. When you do this, you donate the security at fair market value and are not subject to any capital gains tax. The donor-advised fund receives the full value of the security. 

If you were to liquidate your security, pay the capital gains tax and then make your donation the charity would recieve a smaller gift. 

You can receive an immediate tax deduction of up to 30 percent of your adjusted gross income for gifts of securities, mutual funds, real estate, and other assets. 

You also receive a five-year carry-forward deduction on gifts that go beyond the 30 percent limit.  

Donor-advised funds benefit both donors and their charities in many ways. Taking time to meet with a specialized team of investment experts will help you understand best how to set up and manage the fund. 

Non-Tax Benefits 

Donor-advised funds give you a way to donate money to a charity and receive a nice tax break. There's no doubt they benefit both the donor and the charity. But they also have some non-tax benefits. 

1. Simplified Recordkeeping

If you've ever calculated and filed your own taxes, you understand the headache of receipts. When you give to multiple charities, you must keep track of multiple receipts. 

A donor-advised fund will give you one tax receipt that qualifies for all the charities the donations go to. So you have simplified record keeping and not a messy paper trail. 

2. Time

You have time to figure out exactly where you want your donation to go but once you pass away, the only thing you have left is your legacy. 

A donor-advised fund will support your legacy planning. It allows you time to figure out how you want your legacy to look. You can research the charities and give to the cause that best supports your legacy. 

3. Name 

You can give your donor-advised fund a name. This means whenever a charity receives a fund, it will not come from "Joe Smith." It will come from the "Smith Family Fund" or the "Joe Smith Fund." 

Give Money, Save Money

Donor-advised funds allow you to be a little smarter and tax efficent with your charitable inclinations. In the end, you can use these funds as a tool to manage your donations and make sure you are receiving the full deduction for those donations.

For more information on how to save money on taxes, contact us

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