By Jim Shellenberger, CFA, CFP®
Are you looking for ways to optimize your charitable contributions? Donor-advised funds (DAFs) are a great strategy to not only reduce your tax burden but also increase the impact of your generous donations. In certain situations, your charitable contributions might even allow you to completely offset your taxable income. Explore the following insights to understand what DAFs are and how they can help you and the causes you care about.
Charitable Giving Under the Tax Cuts and Jobs Act (TCJA)
If you’re charitably inclined, you’re 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. Essentially, your benefit for giving to charity has now been reduced by more than 30%.
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 cash contributions, 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 take a look at an example. The 2024 standard deduction for a married couple filing jointly is $29,200. Assume that you have been donating $15,000 per year to charity. When combined with your property taxes and mortgage interest (totaling $16,000), you have total itemized deductions of $31,000 each year. That means you may only receive a tax benefit of $3,300 in 2023 and $1,800 in 2024. Your total tax deductions over the two years are $62,000.
Now, instead imagine that you open a donor-advised fund in 2023 and contribute $30,000 to it to cover your charitable giving for 2023 and 2024. In 2023, you will have itemized deductions of $46,000 ($16,000 of mortgage interest and property tax combined with $30,000 contributed to a DAF). In 2024, you can simply take the standard deduction since you have no charitable giving to report. Your total deductions over the two years will be $75,200.
By utilizing a donor-advised fund, you end up with $13,200 more in deductions over the course of two years. If you are in the 24% tax bracket, that’s a tax savings of almost $3,200. 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.
A Custom Strategy for Maximum Impact
Don’t allow tax regulations to prevent you from supporting the charities and causes close to your heart. Even with the recent increase in standard deductions, donor-advised funds offer a great avenue to keep the tax benefits associated with your charitable contributions.
Here at Elevate Wealth Management, we’re ready to join forces with you in making a positive impact on our world. Our experience lies in guiding clients toward financial well-being, wealth accumulation, and strategic planning for the future. Your charitable contributions are a vital component of this complex puzzle. We work in tandem with our partners, including tax planners, to help you reach your goals while crafting a tailored plan that aligns with your specific circumstances. If you’re considering whether a donor-advised fund is right for you, we invite you to schedule an introductory meeting by reaching out to us at jshellenberger@frontierasset.com or 307.673.5675.
About Jim
Jim Shellenberger, CFA, CFP® is a financial advisor at Elevate Wealth Management, an independent, fee-only wealth management firm serving young professionals, pre-retirees, and retirees in Sheridan, Wyoming, and surrounding areas. With the mission of serving and educating, Jim is dedicated to providing comprehensive, top-notch services that not only help his clients reach their goals, but also empower them to make the best financial decisions for their lives and walk toward their future with confidence. Jim is known for going the extra mile, not only offering valuable knowledge in investment management as a former investment analyst, but building long-lasting relationships so he can give honest, customized advice and strategies that make an impact on their lives.
Jim has a bachelor’s degree in business administration with a minor in finance from the University of Wyoming. He is proud to be a Wyoming native and loves exploring the outdoors with his family—hiking, fishing, hunting, and backpacking. Faith is an integral part of Jim’s life, and he always looks forward to attending church on Sundays, Bible study on Fridays, and being part of his church community. He’s also an avid sports fan! Fun fact: Jim owns shares in the Green Bay Packers. To learn more about Jim, connect with him on LinkedIn.
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