Under the new tax law, many taxpayers find themselves receiving more benefit taking the standard deduction instead of itemizing. This is due to several reasons, but most notably the law has changed the standard deduction available to $24,000 for taxpayers who are married filing joint plus another $1,300 per taxpayer who is over the age of 65. Another important factor is the taxes portion of the itemized deductions (state and local tax payments and real estate taxes) now getting capped at $10,000. Because of these changes, many taxpayers who donate to charity won’t receive tax benefit for their donations because they will still benefit by taking the standard deduction. If you donate to charity every year and still find yourself taking the standard deduction, there may be a great tax planning opportunity for you to take advantage of known as a donor-advised fund.
Example: You’re filing a married filing joint return. Let’s say your state and local tax payments plus your real estate taxes are capped at $10,000 and you have $8,000 of mortgage interest. This puts you at $18,000 of total deductions. Since the standard deduction is now $24,000, you wouldn’t receive tax benefit for the first $6,000 of charitable contributions. In other words, if you gave $6,000 or less every year to charity, you wouldn’t receive any tax benefit for those contributions. This is where the donor-advised fund comes into play. You could, for example, donate five years of contributions (6,000 x 5 = $30,000) into a donor-advised fund all in one year. Doing this, you would receive the $30,000 deduction in the year you donated to the donor-advised fund. Here’s what your deductions would look like:
Not using donor-advised fund:
Year 1 – Year 5: $24,000 per year = $120,000
Total = $120,000
Using donor-advised fund:
Year 1: $18,000 (mortgage and taxes) + $30,000 (contributed to donor-advised fund) = $48,000
Year 2 – Year 5: $24,000 per year (giving $0 to charity) = $96,000
Total = $144,000
Once the contribution to the donor-advised fund is made, the funds now belong to the charity since donor-advised funds are components of a qualified charitable organization. The charity has ultimate control over the distribution, but you can still advise the charity on who to distribute to, how much to distribute, and the timing of the distributions to the ultimate recipient. The charity will generally follow your recommendations and must retain discretion regarding the use of the funds.
If you would like to discuss donor-advised funds in further detail or any other tax planning, please give us a call.