A Donor Advised Fund is a separate charitable investment account that allows you to support many of your favorite charitable organizations. Donations of cash, securities, and other eligible assets may provide an immediate income tax deduction up to annual federal charitable deduction limits. When used properly, a Donor Advised Fund can be a highly effective tax minimization strategy for many investors.
What Are The Benefits Of Donor Advised Funds?
Donations made to a Donor Advised Fund can grow on a tax-free basis and be diversified into various investment options. Interest, dividends, and capital gains earned inside a Donor Advised fund are not taxable for the investor because the income was earned after the charitable donation was made.
The owner of the Donor Advised Fund maintains control over the gifts made to qualified charities. Donations can be given immediately, over several years, or used to leave a legacy to charity after the owner passes away.
How Changing Tax Laws Affect Donor Advised Funds
Donor-Advised Funds have become an increasingly popular tool for charitable giving strategies since the Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. This act brought significant changes to the federal tax code, and most of these changes took effect for the 2019 tax year.
The TCJA changed charitable giving strategies for many investors because of the increased standard deduction and the $10,000 limit for State and Local Tax deductions allowed for itemized deductions each year.
Combining these two changes made it difficult to itemize deductions for many investors. Charitable donations are a tax deduction included in itemized deductions. The standard deduction for 2022 is $25,900 for married couples filing a joint return and $12,950 for single filers.
The tax law changes have led to many taxpayers losing most of their income tax deductions for charitable donations because they can no longer itemize deductions.
What Is Charitable Stacking?
To mitigate the effects of changing tax laws, taxpayers can utilize a tax minimization strategy called “Charitable Stacking,” which involves prepaying several years’ worth of planned charitable donations into a Donor Advised Fund. This may allow the taxpayer to claim an itemized deduction greater than their standard deduction in a single tax year. The taxpayer could then make their planned charitable donations from the Donor Advised Fund during the following years.
Our firm calls this tax minimization strategy “Charitable Stacking” because you stack multiple years of donations into one year. The Charitable Stacking Strategy may provide an additional federal income tax deduction that would otherwise not be realized with many investors’ current charitable giving strategy.
What Are The Benefits Of Charitable Stacking?
The Charitable Stacking strategy can be amplified by funding several years’ worth of charitable donations into a Donor Advised Fund with a highly appreciated investment instead of simply writing out a check to the Donor Advised Fund.
The taxpayer can avoid paying capital gains taxes on the highly appreciated security by transferring the shares to the Donor Advised Fund. The appreciated security can be diversified into other investments inside the Donor Advised Fund with no capital gains taxes because the gains are realized after being donated to the charitable investment account.
The benefits of combining the Charitable Stacking and donating highly appreciated securities strategies are twofold. The potential capital gains taxes on the appreciated investment are avoided, and the entire amount donated to the Donor Advised Fund may be used as an itemized deduction when filing income taxes.
For best results, consider implementing the Charitable Stacking strategy in higher-earning years, potentially making the deduction from the strategy more valuable. As always, consult with your tax preparer before changing your charitable giving strategies.
How Bernicke Wealth Management Can Set Up A Donor Advised Fund
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Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. Please discuss your particular situation with the appropriate professional prior to investing.