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Preserve Tax Deductions by Using Donor-Advised Funds Strategically

Preserve Tax Deductions by Using Donor-Advised Funds Strategically

By    |   Thursday, 03 May 2018 02:57 PM

With the new tax rules, fewer people will be able to claim itemized deductions in 2018. Is there a way to keep your charitable contributions deductible?

With a donor-advised fund, it may be possible. But it takes planning.

A donor-advised fund is like a charitable savings account. You can contribute to the fund, which is a bona fide charity, whenever you like and then recommend grants to various charities.

Donor-advised funds are the perfect way to manage your charitable giving under the new tax rules. Many taxpayers will get more bang for their charitable buck by lumping donations into one calendar year rather than giving them evenly each year.

Here’s an example. Suppose you’re a married couple with $20,000 worth of deductions, including $3,000 you plan to give to charity in 2018.  The new $24,000 standard deduction means you’ll no longer benefit from itemizing deductions.

But if you give $9,000 this year to a donor-advised fund, you’ll exceed the $24,000 threshold and will therefore benefit from deducting your charitable contributions. In 2019 and 2020, you can choose to give the fund nothing and thus stick to your $3,000 yearly budget averaged over three years.

If you have an especially high-income year, you can time your gift to make the most of your potential tax deduction, even if you are not sure where you want to give it.

A large enough contribution might even keep you from climbing into a higher tax bracket.

Giving appreciated securities is one of the most tax-efficient ways of donating. You avoid capital gains taxes and pass more value to the charity.

But it may not be practical if you want to give a small amount to a particular charity or if the charity does not accept asset donations. Instead, you can give appreciated securities to the donor-advised fund. Then you tell the fund how much you want to give to each charity.

Between the time you contribute to the fund and disburse the gift to a charity, the invested assets grow tax-free.

While donors can make grant recommendations to the fund's sponsor, technically they are not binding, though they’ll normally be followed. Gifts to a donor-advised fund are irrevocable.

Flexibility and estate planning

Donor-advised funds are flexible. Some require a relatively small donation to establish an account. You may direct grants to any bona fide charity at any time. The minimum grant size is usually low, in the range of $50.

You can also use your fund in combination with other charitable giving strategies. For example, you can make the fund a beneficiary of your IRA. You’d name a family member or another trusted person in charge of choosing the charities to receive distributions after your death.

IRA distributions to your heirs are subject to income tax if you received a tax deduction for your contributions. But the portion given to charity is not taxed.

This technique can allow you to incorporate charitable intentions into your estate plan while preserving greater flexibility than naming a charitable beneficiary outright. It can also involve your children or heirs in your philanthropic work.

Donor-advised funds, though often advantageous, are not right for everyone.

For instance, if you plan to make a large one-time gift, giving directly to the charity may be simpler and more cost-effective since you’ll also avoid the fees the fund charges.

Benjamin Sullivan, Certified Financial Planner (CFP®), IRS Enrolled Agent (EA), is a client service and portfolio manager with Palisades Hudson Financial Group’s Austin, Texas, office. Palisades Hudson is a fee-only financial planning firm and investment manager based in Fort Lauderdale with $1.4 billion under management. It offers financial planning, wealth management, and tax services.

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By bunching gifts you may be able to get deductions otherwise lost because of the new tax law. These funds also make it easier to give appreciated assets to charities.
preserve, tax, deductions, donor, funds
Thursday, 03 May 2018 02:57 PM
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