Give Your Giving a Tax-Friendly Spin Using Qualified Charitable Donations
In my last article, I described how the 2017 Tax Cuts and Jobs Act (TCJA) effectively eliminated the ability for most taxpayers to get a tax break on annual charitable contributions. I also shared a strategy for making tax-advantaged charitable contributions with a Qualified Charitable Donation (QCD).
Unfortunately, QCDs are only available if you’re at least 70½ years old. Today, let’s explore a strategy available to all taxpayers: the Donor Advised Fund (DAF).
The TCJA essentially doubled the standard deduction to $12,000/$24,000 for individuals/married couples. It also capped the itemized deduction for various state taxes ($10,000 max), and eliminated Miscellaneous Itemized Deductions. The result: Most Americans will be taking the standard deduction, which effectively eliminates tax-advantaged annual giving.
So, instead of giving some every year, you could give more in a single year – enough to itemize – and then hold off for a while. There’s a catch. While establishing “fat” and “lean” giving years may be a good tax strategy, it may be hard on your recipients who are counting on a regular income stream.
Enter, the DAF. A DAF is a charity, so when you fund it, it’s a charitable donation. Your donation is typically invested per your guidance, and you advise the DAF on which charities should benefit … and when.
Say you and your spouse incurred at least $10,000 in state taxes and $7,000 in mortgage interest, and you plan to donate $6,000 at year-end, for $23,000 total. Since your standard deduction is $24,000, it’s not worth itemizing. Instead, you could donate $30,000 to a DAF before year-end, and then advise your DAF to grant $6,000 annually to your favorite charities.
In year one, your itemizable deductions are now $47,000 total, which you can itemize. Expect a tax savings of at least $7,000, thanks to your charitable giving. Your future annual tax-deductible contributions will be $0 (since you took the entire deduction up front), but that’s ok. You’ll take the standard deduction for the next four years.
As a bonus tip, consider donating appreciated stock instead of cash, to eliminate some capital gains taxes while you’re at it. And do read the fine print when choosing a DAF. They aren’t all identical.
Written by John A. Frisch, CPA/PFS, CFP®, AIF®, PPC®