Donor advised funds appear to be gaining in popularity and use. Part of the reason for this is due to changes in the tax code brought about by the 2017 Tax Cut and Jobs Act (TCJA.) The TCJA has made significant changes to the deductibility of charitable gifts…
What are Donor Advised Funds?
A Donor Advised Fund (DAF) is a charitable giving entity administered by a public charity
that is created to manage charitable donations on behalf of organizations, families and individuals. A DAF allows you to donate funds in one year and claim the tax deduction in the same year, but disperse gifts to qualified public charities that you identify at a future date.
DAFs are rising in popularity due to the increase in the standard deduction under TCJA, fewer people will itemize deductions.
What’s the Advantage of Bundling Your Donations in a DAF?
By aggregating several years’ donations through a contribution to your DAF, you increase your tax deduction for charitable gifts thereby allowing your total itemized deductions to exceed the increased standard deduction. This contribution creates a current tax deduction and allows your funds to be invested and to grow in DAF until they are distributed to qualified charities in the future. Your DAF is not subject to any mandatory distribution requirements, but can provide contributions at any time until its funds are exhausted.
Mr. and Mrs. Giftgiver
|
For sake of example, let’s take a couple Mr. and Mrs. Giftgiver, who donate $5,000 per year to The American Red Cross each year and $2,500 to The United Way. They have a combined income of $150,000 and pay $5,300 in State Income Taxes and $6,000 in real estate taxes. They are considering using a DAF to donate to their favorite charities. Here’s what their tax burden would look like: |
ANNUAL GIFTING |
BUNDLING 5 YEARS OF GIFTS INTO 1 YEAR |
|
Yearly Adjusted Gross Income |
$150,000 |
$150,000 |
|
Property Tax Deduction |
$6,000 |
$6,000 |
|
Income Tax Deduction |
$5,300 |
$5,300 |
|
Charitable Deduction |
$10,000 / year |
$50,000 |
|
Total Itemized Tax Deductions |
$21,000 |
$61,300 |
|
Standard Deduction |
$24,000 |
24,000 |
|
|
$126,000 each year |
$88,7000 |
|
Taxable Income |
$126,000 each year |
$88,700 in year 1 $126,000 in years 2 – 5 |
|
Annual Tax Due |
$19,600 each year |
11,400 in year 1, 19,6000 in years 2-5 |
|
Total Tax Due |
$98,000 |
$89,800 |
Cumulative tax saving of $8,200 by using a DAF to bundle contributions in Year 1.
If you have questions about the potential advantages of Donor Advised Fund or would like to know how to create one, please contact your Zinner tax professional.
