A Charitable Way to Reduce Your Taxes Today
For many, the holidays are about giving. More than one-third of all charitable donations take place during the last three months of the year.
But goodwill doesn’t account for the timing of all of those donations…
For many, last-minute charitable donations play an important role in tax management. That’s because many contributions come with big tax benefits to the donor.
Of course, for some “eleventh-hour philanthropists,” it’s hard to decide which charities to support. The good news? You don’t have to choose right away…
By putting some money into a donor-advised fund (DAF), you can take the tax deduction today and select a charity later, when you’re ready to actually make your contribution.
Donate Now, Give Later
A DAF is an investment account specifically earmarked for charitable giving.
It takes $5,000 to open one, but after that, you may make smaller donations at any time during the years to come.
And since all of the funds in the account will be donated to charity in the future, the IRS lets you take a deduction the year the contribution is made – rather than when a charity actually receives the funds.
Opening a DAF is similar to opening any other type of investment account. You can open one through the charitable arms of many financial services firms like Fidelity, Charles Schwab and Vanguard.
Here’s how you do it…
- First, you must fill out a donor information form.
- Next, you would transfer the assets to the account. (More information on assets below.)
- Once noncash assets (such as stock) are sold, you move the cash proceeds into the DAF-approved investments of your choice to continue growing.
- You grant money to any 501(c)(3) public charity of your choice.
Like any investment account, you’ll have to pay management fees, but the money in the DAF grows tax-free.
As the DAF holder, you get to decide when and where to donate funds. Grants as low as $50 may be made to any IRS-approved public charity.
Donations can even be set up in advance and go into funds chosen by the donor. Plus, you can set the DAF up to make donations after you’re gone.
When you donate cash, you can generally deduct your contributions – up to 50% of your adjusted gross income (AGI) – and significantly lower your tax bill.
But your donation doesn’t need to be cash. Appreciated real estate, art and securities are all eligible DAF donations.
The best part? You get to deduct the assets’ appreciated value (rather than what you originally paid for it), as long as the amount doesn’t exceed 30% of your AGI. Plus, if your donation exceeds the IRS maximum for the year, you get to carry the deductions forward for up to five years.
You can donate almost any kind of asset to a DAF account, including…
- Mutual fund shares
- Publicly traded stocks
- Private and restricted stock
- Real estate
- Life insurance policies
Give More to Charity by Paying Less Taxes
Your chosen charities will receive tax benefits as well. Because when you donate an asset, like a stock held longer than one year, a DAF allows the philanthropist to avoid capital gains taxes.
Take a look at the example below. It shows how you could have saved $13,500 in taxes, by giving stock via a DAF – rather than cashing out your stock and donating the money.
Since you pay fewer taxes, the charity receives a bigger donation. It’s a win-win for everybody.
A Charitable Savings Account
If your required minimum distribution was higher than planned, or if you sold a business or real estate this year, a DAF is one quick and easy way to reduce your AGI and your tax bill.
Think of it as a charitable savings account. You write it off once, and then you can donate to as many organizations as you like. And you can do it all without the hassle of saving donation receipts.
The best part is you don’t need Bill Gates, Warren Buffett or Clinton money to take advantage of this charitable tax-reduction strategy. Anyone can build a lasting charitable legacy starting today.