Written by Cindy Hanes and Larry Autrey
Published in Fort Worth Business Press on November 27, 2017

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Every year at about this time, articles appear in various publications regarding year-end tax planning. These typically focus on reducing your tax burden by shifting income between tax years, increasing retirement plan contributions, harvesting investment losses and increasing charitable contributions.

Unfortunately, there is seldom any discussion of the most tax efficient ways to make charitable contributions. One method is to use a donor advised fund. Doing so can multiply the impact of gifts, reduce ordinary income taxes and, in some scenarios, permanently avoid the capital gains tax.

DONOR ADVISED FUND (DAF)
A DAF allows you to contribute to the fund, receive an immediate tax deduction, and recommend grants to charities from the fund in future years. EXHIBIT 1 shows the substantial tax savings gained by “front loading” several years’ worth of regular annual donations into the fund all at once.

For simplicity, assume a couple donates $50,000 annually to charity, has adjusted gross income (AGI) of $1,000,000 (39.6 percent ordinary income1 and 23.8 percent effective2 long-term capital gains tax brackets) and has no other itemized deductions. They also have a substantial amount in savings and investments that they have no plans to use in the next five years. The standard deduction proposed by the Trump plan3 for married couples filing a joint return is $24,000. Our couple currently itemizes their deductions each year because they exceed the standard deduction. Establishing a donor advised fund instead reduces taxes owed by $38,016, an extra 38 percent over the 5-year period.

CONTRIBUTE APPRECIATED SECURITIES
Much more effective than donating cash is contributing long-term appreciated securities. Our couple from EXHIBIT 1 owns shares of stock currently valued at $250,000 for which they paid $60,000 (their cost basis). Rather than donating cash to set up the DAF in year 1, they can use the securities by either 1) selling them and donating the proceeds to the DAF or 2) donating the actual shares to the foundation, which will then sell them and place the proceeds in the DAF.

Except for those in the lowest tax brackets with a 0 percent long-term capital gains rate, selling securities to make charitable donations will eat up some of the tax benefit because of capital gains taxes. However, donating long-term appreciated assets directly avoids entirely the capital gains tax, allows you to make the same gift for a much lower cost, and dramatically in-creases the amount of tax savings. In our example, the couple creates the same $250,000 value in their DAF but at a cost of only the $60,000 basis, and they save $83,236 compared with regular annual charitable contributions.

OTHER WAYS TO FUND A DAF
The perfect time to create a DAF is when you are considering the sale of a business, closely held stock, real estate, artwork or other long-term appreciated assets. As in EXHIBIT 2, you will receive a charitable deduction for the appraised fair market value and never have to pay capital gains tax on the appreciation.

(However, if the donation is to a private foundation, the deduction is limited to cost basis.) See Family Tradition example at bottom.

NORTH TEXAS COMMUNITY FOUNDATION
The North Texas Community Foundation is a local nonprofit organization with deep roots in Tarrant and surrounding counties. Community foundations are pools of donor funds that are invested on behalf of the fundholders who advise regarding the charities and/or causes they wish to support. The foundation currently helps about 170 families invest and distribute grants from assets totaling about $290 million. The foundation accepts a wide variety of assets, assists in structuring the most tax efficient donation for each situation and provides personalized service tailored to each fund holder’s objectives.

 1Assumes the top ordinary tax rate re-mains unchanged at 39.6%. The House has proposed leaving the top rate unchanged, but starting at $1 million in AGI. The Senate has proposed dropping it to 38.5%. Due to the small differential, and the uncertainty regarding the eventual outcome, we have used the existing 39.6% rate. 2Includes 3.8%Medicare Surtax on Investment Income for high-income taxpayers.

3Assumes the standard deduction will increase because both the House and the Senate have made the same proposal. If the standard deduction is not increased, and remains at $12,700 for married couples filing jointly, the additional savings from front loading would be $20,117 vs. $38,016.

Note: Information contained in this article is not intended to constitute tax advice. Every taxpayer’s situation is unique and should be reviewed with a tax adviser. The examples may or may not be appropriate for your situation. Assumptions regarding changes related to the proposed Trump tax plan are footnoted.

Larry Autrey, managing partner of Whitley Penn, has more than 30 years of tax, advisory and business valuation experience focused on public and private clients. Autrey currently serves as chair for the North Texas Community Foundation Professional Advisor Outreach Cabinet.

Cindy Hanes is a CPA with a master in tax and more than 15 years of experience in tax and consulting focused on endowments, foundations, universities, pension plans, and high net worth families.

She is an active member of the Fort Worth Chapter of the Texas Society of CPAs, the Tarrant County Bar Association, the Lone Star Council of Charitable Gift Planners, Women Inspiring Philanthropy, and the Friends of KERA.

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TAGS : appreciated securities cindy hanes donor advised fund end of year fort worth business press larry autrey north texas community foundation philanthropy professional advisor tax deduction taxes wealth planning