The season of giving is upon us, and so is year-end tax planning. While most of the time a donation to charity is primarily motivated by philanthropic intent, there are often ways to maximize your giving strategies by saving on taxes. One tool to consider in your charitable gifting strategy is the Donor Advised Fund.
With the increased standard deduction under the Tax Cuts and Jobs Act, many individuals who once itemized their deductions now simply take the standard deduction due to the high threshold, removing much of the tax benefits of charitable contributions. “Bunching” charitable contributions in a single tax year is one way to capture a tax benefit in a given tax year by maximizing your itemized deductions. Maybe you don’t want to give this entire donation out in one year and instead prefer to piece it out to multiple organizations over many years. Donor Advised Funds allow you to realize the tax benefit of significant charitable contribution in a single year, while also allowing you to piece out donations to the 501(c)(3) charities of your choice over several years. In addition to the current year tax benefit, the fund can be invested for the future, providing a vehicle for your philanthropy for years to come.
Here’s how it works: You set up a Donor Advised Fund with a sponsoring organization like Schwab Charitable, a 501©3 charity who operates the fund. Be sure to pick a good name for the Donor Advised Fund too, as most sponsoring organizations allow you to name it. Donate to the Donor Advised Fund for a tax deduction in the current year and choose how those funds are invested. When you are ready to send a donation to the charity of your choice, you complete a “grant recommendation” to the sponsoring organization, in this case Schwab Charitable, and they cut a check from your account to the charity.
Looking to maximize the benefit of your donation even further? If you have an investment in your brokerage account you have held for more than one year with significant unrealized capital gains, you can donate all or a portion of the investment to the Donor Advised Fund instead of cash to avoid incurring capital gains tax. Not only do you get a tax deduction on your donation to charity, but you save on the capital gains tax you might have paid to sell the investment. This is particularly useful in cases where an investment has become overly concentrated in your overall investment plan and you need to diversify, or if the position no longer fits in your investment strategy.
Everyone’s financial plan and tax situation is different, so always speak with your financial advisor and your accountant before proceeding with a charitable giving strategy. There are fees and important caveats to understand when opening a Donor Advised Fund, so be sure to carefully read and consider the sponsor organization’s policies with your advisor.
Happy season of giving and happy holidays from your team at APCM Wealth Management for Individuals.
Connor Michael, CFP®