"Bunching" Charitable Gifts Using Donor Advised Funds
The 2017 Tax Cuts and Jobs act made it more difficult for taxpayers to claim a tax deduction for their charitable contributions. The standard deduction is much higher than it used to be so most taxpayers are no longer itemizing deductions. That means there is less tax benefit to charitable gifts.
One strategy that many are utilizing is to “bunch” their charitable giving into every other year. So, in year one, they give enough that they can itemize their deductions. And the next year, they don’t give to the charity at all. This sounds great on the surface – but most charities want you to give the same amount each year.
One particular tool that can be very effective in helping you achieve your charitable objectives and also aid in reducing your overall income taxes is a donor-advised fund. The beauty of the donor advised fund is that while you give to the fund and take a deduction in one year, you can spread of the charitable gifts over a series of years.
What are donor-advised funds? Donor-advised funds are accounts that can be funded with appreciated stock, real estate, cash or other assets. They can be established directly through charities or community foundations, as well as many mutual fund companies or brokerage firms. Contributions made to donor-advised funds are invested and remain in the fund until you determine which individual charity to send a contribution.
What are the benefits of using donor-advised funds? Besides the non-financial benefit of helping a worthy charity, there are many benefits of utilizing donor-advised funds to help facilitate your charitable intentions including:
The grantor receives a tax deduction for the entire value of the contribution (with some limits) in the year the contribution is made, but the gifts to the individual charities can be spread out over several years.
The grantor has control of the name of the donor-advised fund. In other words, you can name your fund The John Smith Memorial Fund (to honor a deceased family member). This aspect of donor-advised funds can also help facilitate anonymous gifting.
Most donor-advised funds allow the original donor to name a “successor” donor. This can enable other family members to become involved in the gifting process.
Gifts can be made to local charities (churches, animal shelters, etc.) or national charities (Red Cross, Salvation Army, etc.).
Donor-advised funds are simple to establish and have relatively low minimum contribution levels ($5,000) compared to other charitable gifting techniques.
The use of donor-advised funds can be an important component of your charitable gifting strategy and should certainly be considered as an effective tool when making year-end gifts. Especially with the tax law change, the donor advised funds can play a role in your tax and charitable giving strategy.