Learn how donor-advised funds can help you amp up charitable donations and potentially offer tax benefits.
The 2018 tax reform legislation has prompted many to rethink long-standing tax strategies, especially as they relate to deductions. It has led many to consider donor-advised funds. What is a donor-advised fund, you ask?
The short answer is, it’s a philanthropic vehicle established at a public charity, according to the National Philanthropic Trust. And in the new tax regime, for some investors, it could be worth a look to see if it’s right for your tax situation.
The 2018 tax changes created higher standard deductions for taxpayers, making it less tax-efficient to write off charitable donations. The standard deduction is now at $12,000 for single filers and $24,000 for those married filing jointly who are younger than age 65, so to itemize deductions, filers must have expenses in excess of those amounts.
This tax code change means some people who used charitable donations to lower their tax bill might want to consider bunching their donations to every other year to possibly get over the standard deduction threshold. Bunching has its downsides—it might not always be feasible for the donor, and charities go through a feast-or-famine cycle when it comes to funding, which can make budgeting for them difficult.
There may be an alternative to bunching donations, and that’s using donor-advised funds for charitable donations.
Lisa Greene-Lewis, certified public accountant and tax expert at TurboTax, says people who set up these funds can make significant charitable contributions and could receive an immediate tax benefit. Once the money is in a fund, donors can recommend how to distribute money from the fund, whether it’s right away or over time.
As the National Philanthropic Trust explains it, you can think about a donor-advised fund like a charitable savings account. Donors can contribute to the fund as frequently as they like and make grants to their favorite charity when they are ready to release money.
Donor-advised funds might be useful for people who want to donate appreciated stock, Greene-Lewis says.
“It’s really great for folks who have stocks they want to donate, because they can potentially forgo the capital gain when they donate. They’re donating directly to those charities, and then they can figure out how those donations are distributed throughout the years,” she says.
According to donor-advised fund rules, when donating appreciated stock (or mutual funds, exchange traded funds, or other securities), the current value gets written off as the donation without having to pay the capital gains tax, Greene-Lewis says. Otherwise, if you sold the stock to make a cash donation, you’d pay the capital gains tax, leaving you less money to donate.
It’s important to note that you may only claim the deduction on securities that have been held for more than one year.
She notes that donor-advised fund tax deductions include up to 60% of adjusted gross income for cash donations. For securities, that figure is 30%. Whether the donation is securities, cash or both, you must itemize in order to take the deduction.
In a donor-advised fund, would-be philanthropists can make investments and money put into the fund which grows tax-free. The National Philanthropic Trust says these funds have become popular, noting that donor-advised funds are now philanthropy’s fastest-growing vehicle in recent years. Today, they account for more than 3% of all charitable giving in the U.S.
They offer greater flexibility, too. Not only can the donor decide when and how to give money, but they can also name advisors and successors, which can get families involved with how to dole out money to charities.
Greene-Lewis says many financial institutions offer donor-advised funds, and the vehicles are fairly straight forward to set up. Each institution may have its own rules on minimums to set up the fund or maximum thresholds, so check on those before putting in money.
And be aware that a donor-advised fund is an irrevocable trust, so make sure it’s money you’re ready to part with, Greene-Lewis says. “Once it’s in, it’s in for good,” she says.
TD Ameritrade does not provide tax advice. We suggest you consult a tax professional with regards to your personal tax situation.
The key to filing taxes is being prepared. TD Ameritrade provides information and resources to help you navigate tax season.
Debbie Carlson is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated and re not responsible for each other’s polices, opinions, or services.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.