One of the changes brought about by the Tax Cuts and Jobs Act (TCJA) is a significant increase in the standard deduction starting in 2018. Because of this, the tax benefits typically associated with itemized deductions, including those from charitable contributions, have largely been diminished. Nevertheless, don’t be discouraged: A donor-advised fund (DAF) could help you continue your tradition of giving and keep your tax savings intact.
What is a donor-advised fund?
A DAF allows you to easily contribute to your charities of choice and realize a tax benefit. Anyone can open one with a minimum contribution—typically $5,000 or more. Like any fund, a DAF can be professionally managed and invested. You, as the donor, dictate when (i.e., in what year) and to where (i.e., which charitable organization) your money will be distributed.
Following are three benefits of using a DAF to make charitable donations:
Your contribution is tax-deductible in the year you make it.
DAFs provide the most tax benefit when you “pre-load” your charitable donations. For example, if you and your spouse typically donate $5,000 a year to a charity, you may want to consider contributing a lump sum (let’s say $25,000 for simplicity’s sake) to your DAF in 2018. When coupled with other deductions, such as those for mortgage interest or state and local taxes, your itemized deductions would exceed the new standard deduction ($24,000 for married couples filing jointly), giving you a significant tax savings for the year. Then, you could schedule an annual distribution of $5,000 to your charity of choice for the next five years. To realize the greatest tax savings, you could make your contributions to the DAF during higher taxable income years.
Your money will grow tax-free.
Your invested charitable contributions will grow tax-free in a DAF. However, most DAFs come with fees, so it’s important to do your research to determine a fund’s annual fee and minimum initial deposit. In most cases, once the DAF is established, the minimum for future contributions is much less prohibitive.
You can contribute appreciated assets.
You can contribute various types of assets to your DAF, including appreciated assets. Your deduction will be for the fair market value of the appreciated asset on the date you contribute it to the DAF. This eliminates the taxable capital gain on the sale of that asset.
Act now to realize a tax savings for your 2018 charitable giving.
Under the new tax law, we expect DAFs to be a popular vehicle for making charitable donations. If you think one may be right for you, give us a call as soon as possible. We can help you better understand your potential tax benefits while determining how a DAF would impact your 2018 tax planning. Once you’re ready to move forward, your broker can help you establish a DAF and make contributions before year-end.
Contact your PWB advisor today.
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