Save on Taxes While Making Charitable Dreams a Reality
A donor advised fund (DAF) established at the North Texas Community Foundation allows you to make a contribution into the fund, receive an immediate tax benefit, and then provide advice regarding grants from the fund in the future. A donor can fund several years of charitable giving or even establish an endowment for a favorite charity and capture a substantially higher tax benefit than if smaller amounts were donated to a charity over several years. Funding multiple years of donations into the DAF could drop the donor into a lower tax bracket in the year of the donation. Then, in future years, the donor might be able to take advantage of the standard deduction rather than itemizing, in effect doubling the amount that is deducted for these years.
This is especially useful for a donor who may have an unusual boost in income in one year, but expect future years to return to more normal levels. Making the larger contribution to the DAF allows the donor to capture the tax benefit, lower the maximum tax bracket at which they pay tax, and also separate the timing of charitable distributions from the timing of the tax deduction.
For cash donations, the maximum annual deduction is 50% of adjusted gross income (AGI). Gifts of appreciated assets are deductible at the fair market value of the asset at the time of the donation but are limited to 30% of AGI.
An example of an appreciated asset is publicly held stock that may have increased in value during the bull market. Let’s assume that a couple owns shares of stock currently valued at $100,000 for which they paid $15,000 (their cost basis). If the couple wants to establish a DAF, they have two options: sell the stock and donate the proceeds to the DAF or donate the actual shares to the Foundation, which will then sell the shares and place the proceeds into the DAF.
As the example below demonstrates, donating the appreciated shares to the DAF avoids the capital gains tax, reduces the ordinary income tax due because of the larger tax deduction and provides a larger contribution into the DAF. Let’s assume the couple in question has Adjusted Income of $400,000 (30% of which would be $120,000, the maximum amount deductible for appreciated assets.)
|Sell Stock & Contribute Cash||Contribute Shares to DAF|
|Proceeds from Sale of Stock||$100,000||$0|
|Less Capital Gains Tax (15%)||$15,000||$0|
|Amount contributed to DAF||$85,000||$100,000|
|Ordinary Income before Deductions||$400,000||$400,000|
|Tax Deduction for Charitable Contribution||$85,000||$100,000|
|Taxable Ordinary Income after Deduction||315,000||$300,000|
Please note that due to settlement date rules at organizations where securities are held, contributing appreciated stock to a DAF will have an earlier cutoff date than cash donations (which must simply be mailed by midnight on December 31st). A contribution is not completed and cannot be deducted by the donor until the issuing corporation of the stock transfers ownership of the stock on its books.
Cindy Hanes, Director of Philanthropic Services, is available at your convenience, 817-877-0702 or firstname.lastname@example.org.
This article discusses the use of a donor advised fund at the North Texas Community Foundation. Future articles will review other types of funds as well as the contribution of other types of assets. Please note that the information provided here is for general educational information and should not be construed as legal or tax advice. North Texas Community Foundation encourages you to consult with your tax advisor or attorney before making any charitable contributions.