November is a great time for gratitude. Especially when Thanksgiving is right around the corner. You can give thanks in many different ways, including time, talent, and treasure. But seeing as how this is a blog about personal finance, let’s talk about giving money. Specifically, let’s talk about tax-efficient giving with a donor-advised fund.
A client of mine LOVES dogs. Recently retired, he and spends most of his time at the dog shelter volunteering. He gives time, talent, and treasure. With recent tax law changes increasing the standard deduction to $12,000 for singles and $24,000 for married filing jointly, most donors are not likely to itemize deductions, especially since state and local income and property taxes (SALT) are limited to $10,000. How can he get a deduction?
Donor Advised Funds
According to IRS.gov, aÂ donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.
In other words, one can donate a large contribution to a donor-advised fund in one year, get the deduction, and spread the gift out over time.
Jane has $13,222 in state and local income and property taxes (SALT). She has no mortgage interest to deduct because her awesome advisor told her to pay it off a long time ago. In order to get a deduction, she has to give more than $15,000 to the animal shelter. She does this. In fact, she gives $15,100. The problem is she’s only getting to deduct $1,100 of her donation above the standard deduction.
$25,100 Itemized Deductions
$24,000 Standard Deduction
$1,100 added deduction.
What could she do?Â If she can afford it, she could donate up to 50% of her AGI to a donor-advised fund. (See IRS limitations on deductions for details.) In Jane’s case, her AGI was $160,000. So she can donate $80,000 in 2019 making her itemized deduction $90,000. This reduces her taxes $13,000 this year. from 2020 to 2025 or whenever she can proceed to allocate her donations to the shelter each year from the donor-advised fund. How can she sweeten the pot?
Donate Appreciated stock
Because of her advisor’s awesome advanced tax deferral strategies, Jane’s most appreciated investments are in her trust or taxable account. In fact, she has a legacy holding from a local packaging company that’s grown substantially. She’s afraid to sell it because she knows she’ll have such a large capital gain. Worth $750,000, she bought it for $45,000.
With a donor-advised fund, she can donate up to $48,000 or
with appreciated stock and avoid the $4500 capital gain tax. She can carry any unused deduction over 5 years.
Giving doesn’t have to be all about money. But if you have enough, and want to give in a tax-efficient way, donate appreciated stock to a donor-advised fund.
For more on tax planning check out Helping Your Heirs AND Others Through Giving.
For more on giving, check out On Giving.
For more on gratitude check out Does being grateful make you wealthier?