Now that the dust has settled on your 2018 taxes, how did it go? Did you find you were paying more or less as compared to previous years? For many taxpayers, one significant difference with the Tax Cuts and Jobs Act (TCJA) is that they are no longer able to itemize deductions, which means that supporting their favorite charitable causes looks a little different.
With or without a tax write-off, many people still want to give generously to the charities of their choice. After all, financial incentives aren’t the only motivation for giving. We give to support the causes we cherish. We give because we’re grateful for the good fortune we’ve enjoyed. We give because it elevates us too. Supporting our favorite causes feels great – for donor and recipient alike. That said, a tax break can feel good too, and it may help you give more than you otherwise could.
To continue to give meaningfully and tax-efficiently under the new tax laws, consider setting up a donor-advised fund (DAF). Donor-advised funds have been around since the 1930s, but they’ve been garnering more attention as a potentially appropriate tax-planning tool under the TCJA.
What’s Changed About Charitable Giving?
To be clear, the TCJA has not eliminated the charitable deduction. You can still take it when you itemize your deductions. But the law has limited or eliminated several other itemized deductions, and it’s roughly doubled the standard deduction (now $12,000 for single and $24,000 for joint filers). With these changes, there will be far fewer times it will make sense to itemize your deductions instead of just taking the now-higher standard allowance.
This introduces a new incentive to consider batching up your deductible expenses, so they can periodically “count” toward reducing your taxes due – at least in the years you’ve got enough itemized deductions to exceed your standard deduction.
For example, if you usually donate $5,000 annually to charity, you could instead donate $25,000 once every 5 years. Combined with other deductibles, you might then be able to take a nice tax write-off that year, which may generate (or be generated by) other tax-planning possibilities.
What Can a Donor-Advised Fund Do For You?
Donating through a DAF may be a great option for you if you want to make a relatively sizeable donation for tax-planning or other purposes. It allows you to retain control over what organizations receive the donations, but you’re not required to allocate all the money at one time. Keeping track of your donations is greatly simplified as well.
Here’s how they work:
- Make a sizeable donation to a DAF.
Donating to a DAF, which acts like a “charitable bank,” is one way to batch up your deductions for tax-wise giving. But remember: DAF contributions are irrevocable. You cannot change your mind and later reclaim the funds.
- Deduct the full amount in the year you fund the DAF.
DAFs are established by nonprofit sponsoring organizations, so your entire contribution is available for the maximum allowable deduction in the year you make it. Plus, once you’ve funded a DAF, the sponsor typically invests the assets, and any returns they earn are tax-free. This can give your initial donation more giving-power over time.
- Donate employer stock rather than cash to supercharge the tax advantages.
You may be accustomed to simply writing a check when your favorite charity asks for a donation, but donating cash directly is not the most tax-efficient approach. Instead you can donate appreciated stocks in kind (without selling them first) directly to your DAF, and then donate to your favorite charities from your DAF. This is advantageous for a few reasons: Instead of paying taxes when you liquidate stock, you get a tax deduction for donating the stock; your favorite charities get much-needed funds. Everybody wins (except the IRS).
- Participate in granting DAF assets to your charities of choice.
Over time, and as the name “donor-advised fund” suggests, you get to advise the DAF’s sponsoring organization on when to grant assets, and where those grants will go.
- Take advantage of the simplified tracking of charitable donations.
At tax time, your DAF will have one consolidated receipt for you to share with your tax preparer.
How We Can Help
Directing some of your hard-earned assets towards causes that are meaningful to you can be very rewarding. If you think a donor-advised fund makes sense for you, we hope you’ll lean on us to help you set it up and meld it into your greater personal and financial goals.