The New Tax Law in Action: How a Donor Advised Fund Restores Your Charitable Deduction
When President Donald J. Trump signed the Tax Cut and Jobs Act of 2017, it made sweeping and immediate changes to charitable
While the new law stopped short of eliminating the charitable deduction completely, as some experts speculated it might, the changes still mean that under the current tax laws your annual deductions may no longer be tax deductible.
Two key tax law changes affect charitable giving:
- The amount that can be contributed to charity increased from 50% to 60% of adjusted gross income.
- The standard deduction for a married couple doubled to $24,000, meaning far fewer people will be itemizing their charitable deductions.
This increase in the standard deduction means planning ahead for your charitable giving will be more important than ever. Many more donors will choose to “bunch” their contributions up in a single year to meet the higher deduction threshold.
A streamlined way to meet the higher deduction threshold is through a donor advised fund (DAF). Donor advised funds allow account holders (donors) to receive an immediate tax deduction while facilitating greater distribution flexibility, allowing donors to make donations at a time of their choosing.
For Wealth Advisors whose clients have philanthropic goals, donor advised funds are now more popular than ever. They allow for tax deductions at the time of the contribution, but their client can decide to grant the money many years into the future.
A solid investment option, donor advised funds begin to grow once the asset is donated, while waiting to be granted to a qualified charitable organization. No matter how the assets actually perform once donated to the donor advised fund, the tax deduction is always determined by the original donation amount.
A Donor Advised Fund Effectively Revives Your Charitable Deduction
Let’s say that in 2018, you and your spouse have combined deductions of $10,000 from state and local taxes, which is the maximum permitted under the new tax rules. You also have $14,000 worth of charitable gifts. This means your total itemized deduction of $24,000 is equal to the new standard deduction – you won’t receive an incremental deduction for the $14,000 of charitable gifts.
What if, instead of giving $14,000 to your favorite charity for two years in a row, you bundled the gifts into a single tax year by donating $28,000 to a donor advised fund?
You now have $38,000 of itemized deductions. The additional $14,000 lowers your tax bill, a savings of about $5,180 for investors in the 37% tax bracket. You’re still free to recommend the donor advised fund grant $14,000 each year to your favorite qualified charity or charities.
Going forward, you might put several years’ worth of donations into your donor advised fund. Every dollar will be tax deductible. If you donated the same amount over time, the first $14,000 each year would not be deductible. You’ll receive a tax deduction in the current year while the assets in your donor advised fund are free to grow without incurring taxes, resulting in more assets for your qualified charities.
Donor advised funds will continue to grow in popularity as they offer donors and Wealth Advisers an ideal solution for charitable planning under the new tax law.
Want to learn more about opening a donor advised fund, or how to support your philanthropy-minded clients who can benefit from a donor advised fund? Click here to learn more or reach out and let us know how we can assist you.