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This will be published in a few hours as part of my Sunday Best post, but I know many of you won't see it there and it will likely generate more discussion here. If you are charitable and have considered a DAF in the past, I think right now is a great time to act. What do you think?
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It looks increasingly likely that tax reform will be signed into law and take effect in two short weeks. Everyone will be affected differently by the changes to the tax code, but there are two provisions that make it more likely that you’ll benefit significantly less from future charitable giving compared to giving now in 2017.
First, the standard deduction will nearly double under proposed tax reform. This means many fewer Americans will benefit from itemizing deductions. If your total deductions don’t exceed the new $24,000 standard deduction, your donated dollars won’t lower taxes one bit.
Second, your marginal tax rate will most likely be lower in 2018 and beyond. A couple earning from $165,000 to $315,000 (married filing jointly) will be in the 24% federal income tax bracket. Currently, most of that income would be in the 33% federal income tax bracket.
Why start a donor advised fund now? Doing so will allow you to take a full deduction at this year’s presumably higher marginal tax rate (assuming you itemize currently). Let’s say, for example, that you plan to donate $10,000 a year over the next five years.
If you donate $10,000 to charity in each of the next five years, you would not receive any deduction unless your other itemized deductions total at least $14,000. The donation would only be fully deductible if your other itemized deductions total at least $24,000. And you will probably be receiving the deduction at a lower marginal tax rate. I expect that to be 24% for us based on my income in the coming year(s).
Conversely, you could start a donor advised fund with $50,000 in appreciated funds today. You’ll eliminate the capital gains in those funds, get a tax refund of your marginal tax rate (for me, that would be 33% of $50,000 = $16,500 plus a state tax refund). You could then give $10,000 (plus investment returns) from the DAF to your selected charities each of the next five years.
To me, it’s a no-brainer, particularly if you already have a taxable account with one of the “big three” brokerages that have low cost funds and similar charitable DAF programs. Those being Vanguard, Fidelity, and Schwab, and they make it simple to open a DAF. The latter two can be opened with as little as $5,000 and allow grants from your fund starting at $50. Vanguard’s minimums are steeper at $25,000 to open and $500 for a grant from the fund.
Finally, don’t think of tax optimization of charitable giving as getting the most back for your donated dollar. Think of it as getting the most money to charity for each dollar you actually part with. You could hand the food shelf a $100 bill or you could give $180 in a tax-deductible manner and it would cost you $100. Which do you think the charity prefers?
For more information, please see the following posts on the subject:
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Never a Better Time to Open Your Donor Advised Fund
It looks increasingly likely that tax reform will be signed into law and take effect in two short weeks. Everyone will be affected differently by the changes to the tax code, but there are two provisions that make it more likely that you’ll benefit significantly less from future charitable giving compared to giving now in 2017.
First, the standard deduction will nearly double under proposed tax reform. This means many fewer Americans will benefit from itemizing deductions. If your total deductions don’t exceed the new $24,000 standard deduction, your donated dollars won’t lower taxes one bit.
Second, your marginal tax rate will most likely be lower in 2018 and beyond. A couple earning from $165,000 to $315,000 (married filing jointly) will be in the 24% federal income tax bracket. Currently, most of that income would be in the 33% federal income tax bracket.
Why start a donor advised fund now? Doing so will allow you to take a full deduction at this year’s presumably higher marginal tax rate (assuming you itemize currently). Let’s say, for example, that you plan to donate $10,000 a year over the next five years.
If you donate $10,000 to charity in each of the next five years, you would not receive any deduction unless your other itemized deductions total at least $14,000. The donation would only be fully deductible if your other itemized deductions total at least $24,000. And you will probably be receiving the deduction at a lower marginal tax rate. I expect that to be 24% for us based on my income in the coming year(s).
Conversely, you could start a donor advised fund with $50,000 in appreciated funds today. You’ll eliminate the capital gains in those funds, get a tax refund of your marginal tax rate (for me, that would be 33% of $50,000 = $16,500 plus a state tax refund). You could then give $10,000 (plus investment returns) from the DAF to your selected charities each of the next five years.
To me, it’s a no-brainer, particularly if you already have a taxable account with one of the “big three” brokerages that have low cost funds and similar charitable DAF programs. Those being Vanguard, Fidelity, and Schwab, and they make it simple to open a DAF. The latter two can be opened with as little as $5,000 and allow grants from your fund starting at $50. Vanguard’s minimums are steeper at $25,000 to open and $500 for a grant from the fund.
Finally, don’t think of tax optimization of charitable giving as getting the most back for your donated dollar. Think of it as getting the most money to charity for each dollar you actually part with. You could hand the food shelf a $100 bill or you could give $180 in a tax-deductible manner and it would cost you $100. Which do you think the charity prefers?
For more information, please see the following posts on the subject:
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