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ON HOLD//Tax Planning: Using Donor-Advised Funds for Charitable Donations

Learn how donor-advised funds can help you amp up charitable donations and potentially offer tax benefits.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Taxes and deductions: donor-advised funds increase charity power
5 min read
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Key Takeaways

  • Donor-advised funds can potentially offer an immediate tax benefit
  • Investments grow tax-free at the federal level 
  • You can typically make donations when you want

Looking to increase your charitable dollars and get a tax write-off? Consider a donor-advised fund. Donor-advised funds are philanthropic vehicles that allow you to make tax-deductible contributions, invest those contributions, and donate to the charities of your choice at a later date.

Following the 2017 tax reform, many taxpayers found out the hard way that their charitable donations no longer met the tax-deduction threshold. The standard deduction for the 2019 tax year is now $12,200 for single filers and $24,400 for those married filing jointly who are younger than age 65. To itemize deductions, filers must have expenses in excess of those amounts.

To reach those thresholds and get the tax write-off, some donors may have to bunch their donations—that is, give every other year to their favorite charities. But bunching donations has its problems—it might not always be feasible for the donor, and charities can go through a feast-or-famine cycle when it comes to funding. This can make budgeting donations difficult.

Donor-Advised Funds on the Rise

To avoid “bunching syndrome,” some savvy givers are opening donor-advised funds. These funds received a big jump in assets for fiscal year 2018, according to charity watchdog GuideStar. In August, GuideStar noted that the latest Columbus Survey of community foundations showed total assets for these funds to be $30.6 billion, with total gifts given at $6 billion and total grants given at $5.4 billion.

And to ensure the charities donors are considering are legitimate, GuideStar puts out data that sponsoring organizations use. This information helps weed out charities that might not be IRS-sanctioned groups.

Lisa Greene-Lewis, certified public accountant and tax expert at TurboTax®, explained why there’s been such a rise in donor-advised funds: “People who set up these funds not only make a significant charitable contribution, but they also receive an immediate tax benefit. Once a fund is setup, donors can then determine how to distribute the money, whether it’s right away or over time.”

Donor-advised funds are particularly useful for people who want to donate appreciated stock, according to Greene-Lewis. “It’s really great for folks who have stock they want to donate, because when they do, they forgo the capital gains tax.”

When donating appreciated stock, the current value gets written off as the donation without having to pay the capital gains tax. Otherwise, if you sold the stock to make a cash donation, you’d pay this tax, leaving you less money to donate.

Greene-Lewis further noted that deductions include up to 60% of adjusted gross income for cash donations. For securities, that figure is 30%.

In addition to donating stock, the National Philanthropic Fund pointed out a number of asset types can be invested in donor-advised funds. Such asset types include mutual funds, exchange-traded funds, cash, bonds, real estate, artwork, collections, and other tangible personal property.

Your Charitable Power Can Grow

Many financial institutions offer donor-advised funds; however, each institution may have its own rules regarding the minimum threshold to set up the fund—as well as contribution limits—so check those before putting in money.

Another consideration to keep in mind before setting up a donor-advised fund is that they’re irrevocable trusts, so make sure it’s money you’re ready to part with, because once it’s in, it’s in for good.

However, donors don’t need to distribute the assets immediately, unlike traditional donations, which are typically directly distributed to a charity. Steve Pike, product manager at TD Ameritrade, noted donors can put the money in, get the tax benefit, and let the assets grow and hopefully accumulate, giving donors the ability to increase their charitable giving.

“That can create a legacy, much like family foundations,” Pike explained. “Your charity legacy and the strategy you create can continue after your passing.”

Donor-advised funds ensure the charities are legitimate, Pike explained, as the sponsoring organization use data from GuideStar. The information in GuideStar help weed out charities that might not be Internal Revenue Service sanctioned groups, Pike noted.

Pike pointed out donors can also pass the assets on to additional donors – spouses, children or someone else. “The flexibility can be great,” he said.

The ability to allow the assets to grow can change how the donor views giving. “If you’ve invested wisely and the balance keeps growing, within 20 years you might have a really sizable fund where you could make a major contribution,” Pike concluded.

TD Ameritrade does not provide tax advice.  We suggest you consult a tax professional with regards to your personal tax situation.

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Key Takeaways

  • Donor-advised funds can potentially offer an immediate tax benefit
  • Investments grow tax-free at the federal level 
  • You can typically make donations when you want

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