By Matthew Gaude & Shawn McGuire
You enjoy giving to causes you care about. When making a charitable contribution, yes, your main goal is to support organizations you’re passionate about and to benefit those in need—it used to be that a nice tax break was just a bonus! However, due to the Tax Cuts and Jobs Act, with its higher standard deduction, many people are losing out on the tax benefits associated with charitable giving.
But rest assured, it is still possible to receive tax benefits for your charitable giving. Donor-advised funds could be the answer.
How the Tax Cuts and Jobs Act (TCJA) Affects Charitable Giving
If you are charitably inclined, you are probably used to itemizing your deductions. However, with the increased standard deduction and the limit on deductions for state and local taxes, 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 as you have previously. Basically, you only get a tax benefit for a fifth of your charitable giving.
What Is a Donor-Advised Fund?
This is why donor-advised funds (DAF) are gaining popularity. A DAF acts as a philanthropic savings account. You put money into it for the purpose of giving to charity and let it sit there until you are ready to give. Unlike a savings account, 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 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 get to 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 letting control of your money go, know that most DAF holders 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
DAFs offer several tax benefits. 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 contributions, including cash, 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.
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.
How Are Donor-Advised Funds Used?
Let’s assume all your spending numbers will be the same for the years 2021 and 2022. The 2021 standard deduction for a married couple filing jointly is $25,100, and let’s assume it will be the same for 2022. 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 $900 of your giving in 2021 and 2022 ($26,000 itemized minus the $25,100 standard deduction) and your total deductions over the two years are $52,000.
Now, instead imagine that you open a donor-advised fund in 2021 and contribute $20,000 to it to cover your charitable giving for 2021 and 2022. In 2021, you will have itemized deductions of $36,000. Then, in 2022, 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 24% tax bracket, that’s a tax savings of over $2,000. If you donate appreciated securities to the DAF, your tax savings will be even greater because you will not face capital gains tax on the disposal of the assets.
Are You Ready to Save Money With a Donor-Advised Fund?
Albert Einstein said, “The value of a man resides in what he gives.” You want to give back, and because 2020 was so difficult for so many, you may be looking to give more if you’re able. But having a strategy for your charitable giving can bring you rewards as well. So don’t let tax laws curb your charitable giving! Even with the new higher standard deductions, donor-advised funds make it possible to continue receiving a tax benefit for charitable giving.
Do you have questions about how you can continue to give generously? Our Live Oak Wealth Management team is here to help you find out if a donor-advised fund can save you money on taxes. Call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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