BIG Tax Benefits of Donor Advised Funds

Time to share my latest personal and client tax-saving and “do-gooder” planning strategy.

Why this strategy has been around for years, I’m just now focusing on it for my family and my clients.

It’s called funding a charitable Donor Advised Fund” or (DAF)

This involves setting up a new brokerage account and funding it with cash or ideally appreciated securities. It potentially has both short and long-term tax advantages while gifting to needy causes of your choice.

Recently, a client of mine with a big heart for multiple charities donated a portion of two big investment winning securities from her brokerage account (that we manage) to a new Donor Advised Fund in her family name. She will get a huge tax deduction that she can carry forward up to five years to offset taxable income.

She also didn’t have pay any capital gains tax and won’t when they are sold under the DAF umbrella. While the money is still invested in the new account she can make gifts to any qualifying charity with a couple of clicks on an app. The money she doesn’t donate this year stays invested and could grow until she gifts it. She can give part or all of it away and if she has a balance at death she can give it then or let her boys take control of the future gifting.

For my family, I just opened The Rosley Family Charity Fund and plan to bunch donations in 2022. By bunching donations in one year rather than spreading them out over multiple years, I’ll be able to itemize my deductions and take advantage of the charitable tax deduction. For example, instead of giving $5,000/year for the next three years, donate $15,000 next year to DAF.

This allows you to take advantage of the charitable donation write off making it more advantageous than the standard deduction. Once the money is in the DAF, donate the $5,000 in year one and invest the difference. Then make the next two donations in the subsequent years. If you want you to repeat this as long as you desire.

What are the advantages of a Donor Advised account?

A charitable donor-advised fund account offers a uniquely flexible way to manage your charitable giving. With this account, you can:

• Realize same-year tax benefits if you itemize deductions

• Potentially eliminate capital gains tax on the contribution of appreciated non-cash assets¹ and investments

• Invest account assets for potential tax-free growth, helping you have more to give to charities

• Give when it is convenient and meets your charitable goals

• Manage your giving online

• Create a lasting charitable legacy

What types of assets can you donate?

You can contribute cash and publicly traded securities, including stocks, most mutual fund shares, and bonds. some brokerage accounts also accept non-cash assets such as IPO stock, restricted stock, private business interests, real estate, and private equity. By contributing non-cash assets to a charity, including a donor-advised fund, individuals generally do not pay capital gains tax on the sale of assets that have been held for more than one year. This can increase the amount available for charity by up to 20% compared to selling the assets and donating the proceeds. Cash contributions must be made in U.S. dollars and delivered by check or wire only.

Why? Capital gains taxes are eliminated when you contribute long-term appreciated assets directly to a charity like a Donor Advised Fund (DAF), instead of selling the assets yourself and donating the after-tax proceeds.

When you assume 20% for federal long-term capital gains taxes, plus a 3.8% Medicare surtax, this leads to a potential increase of 23.8% of both your tax deduction and your charitable contribution.

How donating appreciated securities can reduce taxes

This is a hypothetical example for illustrative purposes only. The chart assumes that the donor is in the 37% federal income bracket. State and local taxes and the federal alternative minimum tax are not taken into account. Please consult your tax advisor regarding your specific legal and tax situation. Information herein is not legal or tax advice. Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%. Does not take into account state or local taxes, if any.

Planning for retirement? Set up and fund a donor-advised fund now, turning your currently high tax bracket into an advantage.

Establishing a donor-advised fund before you retire is an easy, tax-efficient way to make charitable giving a priority in retirement. And there’s potential for a more immediate benefit as well: substantially offsetting your current taxes.

If your tax bracket is higher now than what you expect it to be in the future, consider frontloading your charitable giving by making a large contribution now, rather than smaller gifts in retirement. Not only will you gain the possibility of tax savings in the present year but you’ll also have charitable contributions set aside to recommend as future grants, allowing you to continue supporting charities generously on a fixed income—at a point in your life when you have more time to focus on philanthropy.

Take a multi-year approach toward deductions.

If your income is particularly high this year, perhaps as the result of a year-end bonus, or you’ve sold a business, benefited from an inheritance or otherwise, consider that charitable contribution deductions may be carried forward for up to five years. You are required to claim the maximum deduction possible in the current year—the deductibility limits are 60% of AGI for cash¹ and 30% for long-term appreciated securities—but you can then carry forward any unused charitable deductions for up to five more years. These carried-forward deductions must be used to the extent possible in the next tax year and are considered after any current year charitable contribution deductions. That’s the power of front-loading in a high-income year.

Make a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA.

Converting a traditional IRA to a Roth IRA typically means paying significant taxes, but making a charitable contribution can help offset that income. This strategy may work if you already donate regularly to charity, have sufficient non-retirement assets to pay the cost of the conversion and would consider making a larger-than-usual charitable donation to a DAF to establish a Giving Account in the year of the conversion.

Hypothetical tax amounts assume a 37% federal tax rate, a $500,000 Roth conversion amount and a $100,000 fully deductible charitable contribution. The federal alternative minimum tax, and state and local taxes are not taken into account.

The actual tax benefits need to be calculated by reviewing a “what if” scenario using your past year’s tax return and then seeing how a contribution to a DAF may impact your current year’s taxes.

I have the ability to run that overview for you. I’ll just need a redacted (personal information) .pdf of your prior-year tax return.

CONTACT ME to discuss.

https://fortunefinancialgroup.com

See the video explanation below:

https://www.fidelitycharitable.org/guidance/charitable-tax-strategies/reduce-taxable-income.html

https://www.schwab.com/donor-advised-fund