Charitable contribution planning with a Donor Advised Fund


 

A donor advised fund (DAF) is an investment account in which you make an irrevocable gift and receive a charitable deduction. Once the donor advised fund is funded, distributions can be made over many years to charitable organizations. With recent changes to the tax laws fewer taxpayers are itemizing their deductions and instead receiving the standard deduction ($12,400 for single filers and $24,800 for married/joint filers in 2020). Taxpayers who have regularly been charitable and accustomed to receiving a tax benefit for their charitable contributions may no longer have the tax benefit.

For example, a couple both age 65 have a combination of the following deductions; taxes $5k, mortgage interest $7k and charitable contributions $10k, totaling $22k for the year. Since they are both 65 their standard deduction would be $24,800 plus another $1,300 each for being 65 or older, for a total of $27,400. Their standard deduction of $27,400 is greater than their total itemized deductions of $2k, they do not receive a tax benefit for their $10k of charitable contributions.

If the couple in our example above utilized a DAF they could make a lump sum contribution of $30k to the DAF for the current year. When combined with their other deductions; $5k for taxes and $7k in mortgage interest their itemized deductions would $42k, or about $15k more than their standard deduction. The additional $15k of deductions at a combined federal and state tax rate of 25% would save them just under $4k in taxes.

With $30k in the DAF they are able to continue with the regular charitable giving. The plan would be to transfer $10k per year over the 3-year period to charitable organizations they would be donating to on a regular basis. They would receive the full tax benefit of their contribution with their other itemized deductions in the initial year. Then take the standard deduction the following two years without directly making additional charitable contributions.

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