Tax Smart Charitable Giving – Donor Advised Funds

In this video I intend to

  • Highlight the real benefit of philanthropic giving
  • Share a surprising stat on the tax deductibility of charitable giving. And…
  • Provide some

Charitable giving is so good!   It is good for those in need of the support, of course, but the Cleveland Clinic reports that giving can lower stress, lower blood pressure, combat feelings of depression and even lengthen ones lifespan. Maya Angelou went even further suggesting that “…among its other benefits, giving liberates the soul of the giver.”

So really giving’s not just good, it’s great!  Let me encourage you to find a cause you support and give generously of your time, money, or talents.

 

Having highlighted the REAL reason to give, as a financial planner and wealth advisor, it is not lost on me that people also like the benefit of tax deductions that are offered to those of us who give to charity.  But did you know that only 30% of people who donate to charity actually receive a deduction for their annual gifts?  It may be worth checking your own tax return to see if you are or aren’t.  If not, hopefully an idea shared here today may benefit your giving strategy moving forward.

The primary reason people do not receive a tax benefit for their giving is because they aren’t itemizing their deductions.  Why not?  Well, because you have to beat the Standard Deduction for it to make sense to itemize.

Let’s take a look at what are the allowable deductions for itemizing:

  • State & Local Taxes on property – Importantly, this was capped at $10,000 back in 2017 under the Tax Cuts and Jobs Act
  • Mortgage Interest – Available on the first $750,000 of loans
  • Doctor and Dental expenses exceeding 7.5% of your Adjusted Gross Income, AND
  • Charitable Contributions

Here’s a quick example

Married couple, Tom and Sue file jointly.  The following details pertain to their 2024 itemizable deductions:

  • $10,000 State & Local Taxes – even though they paid more, they hit the $10K cap
  • $11,700 Mortgage Interest
  • $0 Qualifying Medical Expenses
  • +$6,000 Charitable Contributions
  • $27,700 TOTAL ITEMIZED DEDUCTION

Because their total of $27,700 deductible expenses does not beat 2024’s Standard Deduction of $29,200 they would use the Standard Deduction.

With sufficient savings and investments, we encouraged Tom and Sue to utilize a tool called a Donor Advised Fund to make 5 years of charitable donations all in one year, a strategy called “bunching”.  Here’s what that looks like:

  • $10,000 State & Local Taxes – even though they paid more, they hit the $10K cap
  • $11,700 Mortgage Interest
  • $0 Qualifying Medical Expenses
  • +$30,000 Charitable Contributions
  • $51,700 TOTAL ITEMIZED DEDUCTION

Now with deductible expenses of $51,700 exceeding the Standard Deduction, they will itemize.

Before offering another strategy on maximizing your giving strategy for tax benefit, a quick note on the Donor Advised Fund for those who may be unfamiliar… it is a vehicle in which you can transfer cash and/or securities for which you will

  1. Receive the full tax benefit of the gift in the year it is made, but
  2. Allows you to distribute the funds to your choice of qualified charities over time, meaning you can recommend grants out of the DAF for years to come.

 

Now about that additional strategic nugget on maxing your tax benefit.  Consider that Tom and Sue had enough saved in cash to make their $30,000 contribution to the Donor Advised Fund.  Their benefit would work like this…

(image of the math) Assuming a Federal Marginal Tax Rate of 32%, their gift saved them $7,200 in taxes.  This math suggests that it effectively cost $22,800 to give $30,000 after the tax savings.  What could be better than that??  Well….

(Image of Math) Tom and Sue also had a technology stock, which over the years had grown from their original investment of $10,000 five years ago to just over $30,000 now.  Given their situation, I encouraged them to donate the stock to the donor advised fund instead of the cash. Why?  Well, check this out…

By donating the shares of the stock, Tom and Sue were able to still recognize the full deduction of their $30,000 gift like in the cash example, but had the added benefit of eliminating the taxable gain on their stock position.  Assuming a 15% Long-term Capital Gains Rate and a 4.5% State Tax this strategy of gifting appreciated stock generates an additional tax savings of approximately $3,900 on the gain above and beyond the $7,200 total deduction.  I’ll note it is very possible, based on income that the capital gains tax could be higher still.

Interestingly, Tom and Sue still believed in the growth potential of the technology stock, so we took the $30,000 cash they’d considered for the gift and repurchased the stock adding one more benefit to this scenario in that they were able to maintain the same position in the stock but now having reset their cost basis.  In other words, they now have the same position in the stock, $30,000, but have eliminated the gain to keep taxes lower if they decided to sell the position later.

 

If you find yourself with a desire to give, and want to investigate doing so strategically for tax benefits, reach out to our team at Professional Planning & Wealth for a conversation on how we could help create a plan.