The number of donor-advised fund accounts has tripled in the past four years and it is due to more than taxpayers responding to Tax Reform and “prefunding” their charitable giving. The number of donor-advised funds surged last year to more than 463,000 across community foundations, charities and commercially backed platforms. The funds can be used to disburse grants to IRS qualified non-profits and will take care of all paperwork, regulations and administration for a small fee.
When the market is up, folks tend to donate appreciated securities. Last year was truly the first year that donors were filing under the new tax law and surprised by the new standard deductions, so putting money in a donor-advised fund in anticipation that they might not hit the threshold would be a way to get over it for these deductions. The doubling of the standard deduction demands aggressive tax planning. To take advantage of going beyond the standard deduction, putting some extra money in a donor-advised fund, is being safe rather than sorry.
Tax reform makes the strategy of bunching very attractive. You can bunch two or three years and take advantage of that year, yet In between still make grants to a favorite charity, but do it from a donor-advised fund instead of a checkbook. This attribute makes donor-advised funds not just for the rich but also middle-class taxpayers interested in bunching their donations. Some minimums are as low as $5,000 so taxpayers can contribute to a donor-advised fund every other year, get two years of giving out of that one year, and benefit by getting above the standard deduction. There is even a trend toward payroll contributions to donor-advised funds.
Critics argue because there is no payout requirement, a donor-advised fund could be abused by the wealthy to hoard money and get immediate tax breaks without any guaranteed timeframe for when the money will find its way to a charity. Regulatory scrutiny may be down the road in the future, until then a donor-advised fund allows benefactors to group donations into one contribution that would make it worthwhile to itemize one year versus taking the standard deduction. Such a fund can then distribute gifts for years thereafter and unlike a private foundation, gifts from a donor-advised fund are anonymous. Not only is there no time limit on how quickly the money must be distributed, there are no rules how much must be distributed each year.
Contact Us: DAFs are attractive to donors because they provide the benefits of greater tax deductions, more flexibility over spending and fewer regulatory costs and hassles than a private foundation. Cash contributions to DAFs can be deducted immediately up to the maximum allowed by the IRS, and non-cash contributions can shirk the capital gains tax. Our tax experts have plenty of tax efficient ideas to minimize your tax liability,. DAFs are just one of them. It is already December, but there are still opportunities to limit your tax liability if you act now. Contact our New York or Florida tax experts toll free at 855-534-2727.
