By Adam Strauss
With the passage of the Tax Cuts and Jobs Act on December 22, 2017, donor-advised funds have suddenly become a far more important vehicle to help charitably-minded, tax-conscious individuals and families benefit from their charitable donations.
In prior years, you may have enjoyed a charitable tax deduction along with other itemized deductions, but under the new tax law, with a giant increase in the standard deduction, it will be much harder for most people to realize that same tax benefit. However, a donor-advised fund may be the tool you need to continue to maintain your charitable giving while also maximizing your tax savings.
What is a Donor-Advised Fund and How Does it Help Reduce Taxes?
A donor-advised fund is an easy, tax-efficient way to contribute to your favorite charities (while minimizing your taxes). Anyone can open a fund with an initial contribution of $5,000 or more, after which the fund can be professionally managed and invested for future growth. Once a donor-advised fund has been established, the donor can make contributions to charities out of the fund’s assets at any time.
Donor-advised funds have become more useful to many taxpayers under the Trump tax plan.
Under the new law, charitable contributions remain a tax-deductible expense, but it will be much more difficult to realize tax benefits from itemization. Starting in 2018, the standard deduction increases from $6,300 to $12,000 for single filers and from $12,700 to $24,000 for those who are married and filing jointly.
The law also limits state and local tax (SALT) deductions to $10,000, which includes property taxes. If you live in a high-cost, high-tax state, your property taxes and state income taxes may well exceed the $10,000 limit, which means you will not be able to fully deduct all of the SALT taxes you pay as you have in the past.
These changes will make it more efficient for many taxpayers to simply accept the standard deduction, which, in many cases, eliminates the tax benefits of itemized deductions from charitable donations.
However, a donor-advised fund may allow you to make contributions on your preferred schedule while also maximizing the tax benefit of your donations. By front-loading several years of charitable donations into a single tax year gift to your donor-advised fund, you can realize the tax benefits from itemized deductions while also maintaining the freedom to make charitable gifts over time as you see fit.
Let’s assume that you give roughly $5,000 per year to various charities. With a donor-advised fund, you might contribute $25,000 once every five years, thus maintaining the same rate of annual giving. Because a contribution to a donor-advised fund is immediately tax deductible, you would contribute enough to enjoy the tax benefit of a gift in year one, and then distribute $5,000 to charity annually (while taking the standard deduction) over the next five years.