Donor-Advised Funds: A Solution to Itemized Deductions Loss While ‘Doing Good’

For families who previously used itemized deductions for charitable giving when filing their taxes, The Tax Cuts and Jobs Act (TCJA) will remove this benefit, resulting in default to the standard deduction for their 2018 filing.  This effects a household choosing to use charitable giving as a tax deduction, increasing the tax cost to them by 7%.  The change has charities anticipating that donations may be down since the new act is likely to discourage charitable giving.  TCJA also caps state and local tax deductions.  The act of giving to better society is the prime reason many families choose to donate; the tax deduction is a bonus.

There is a solution to the tax benefits of giving through Donor-Advised Funds (DAF)s.  Donor-Advised Funds allow the donor to bunch more substantial contributions together instead of making yearly contributions, helping to push their itemized deductions above the standard deduction level.  Some features of DAFs:

  • Most or all of the DAF contribution is tax-deductible when moving money into it at the time its set up.
  •  The DAF doesn’t need to indicate the charity
  •  The DAF allows for multiple charities to benefit, not just one as required when setting up a foundation.
  • If invested effectively, the funds can grow tax-free, resulting in considerable donations later.
  •  Donations from the fund issue as ‘grants’ to a charity, or multiple charities

Critics of DAFs argue that in extreme cases, donors don’t have to distribute money to charities until their death.  They also feel that if one wants to donate, they should without a DAF, and not in a way that creates more expense.  However, for those that do donate, DAFs ensure not only a tax benefit but a human benefit as well.

DAFs allow the donor to make contributions from their IRAs (donor must be over 70 ½ years old), up to $100,000 per year to charity.  DAFs can satisfy the required minimum distribution (RMD) from IRAs, but can’t accept contributions from a 401(k) account.  The IRS has guidelines on DAFs to follow, or consult your tax professional for the latest changes.

If you have questions on DAFs and how they may fit into your charitable giving plan we welcome your inquiry.  DAFs are an integral part of giving to help make the world a better place.