The Tax Cuts and Jobs Act (TCJA) went into effect on January 1, 2018. Economists argue over the winners and the losers, but one obvious loser was charitable donations and the charities that depend on them.
The new tax law nearly doubles the standard deduction in 2018 — to $12,000 for singles and $24,000 for joint filers younger than age 65 — while capping or eliminating other deductions. This means it will no longer make sense for as many taxpayers to itemize deductions. In 2017, 30% of taxpayers itemized; under the new tax law that is expected to drop to less than 10%. This means that (without tax planning) 90% of taxpayers will have no tax benefits associated with charitable giving.
Certainly the biggest reason WHY donors give is generosity and commitment to a cause. But just as certainly HOW MUCH donors give is tied to the tax benefits. According to Charity Navigator, 12% of total annual giving occurs in the last three days of the year. Committed donors are now looking at a substantial increase in the after-tax cost of their gift. Charities are bracing for a reduction in giving of $16 billion to $24 billion annually (total giving was $390 billion in 2016, according to Giving USA).
This has led to a surge in the use of Donor Advised Funds, a means for middle and upper income taxpayers to still realize the tax breaks, and to do their giving the way the rich do.
Donor Advised Funds are established by “sponsors” – mostly the major financial/investment institutions. The individual establishes a DAF, makes one larger donation to his/her Fund, and takes the deduction in one tax year. In other words, instead of donating $10,000 a year for five years, and getting $00 in Federal tax relief; you donate $50,000 in the first year to your DAF, take the full deduction that year, and in the other four years use the higher standard deduction. The tax savings can be significant.
Each year, you advise the Fund where to send donations. At present, there is no legal obligation that you expend all of the money over any given period of time. The money is fully invested, it grows tax free, and the charity of your choice receives a regular contribution.
The use of Donor Advised Funds has surged since the enactment of the new tax law. Fidelity Charitable, a donor-advised fund sponsor, reported an 83% increase in new donors over the previous year; and Schwab Charitable saw the number of new accounts opened in the last six months of 2017 jump by 91% compared with the same period in 2016.
There are also other advantages. The new tax law has preserved the large tax break for contributing appreciated stock rather than cash. If you sell an appreciated stock and give away the money, you pay capital gains tax on the sale, and may not be able to deduct the gift given the higher standard deduction. But if you gift the stock, you avoid the capital gains tax while realizing a deduction of the full appreciated value of the asset. It may be hard to doll out shares of stock to different charities you want to benefit. In a DAF, you can donate the stock, realize the full deduction, the stock can be sold within the DAF (which is tax exempt) and the money distributed as you instruct. Vanguard reported that more than 80% of contributions to its DAF from October to December 2017 were non-cash assets, mostly appreciate securities.
Another advantage is that the DAF takes care of all the record keeping. You do not have to maintain detailed records to prove all of your donations at the end of the year. Instead, there is only one donation to a DAF and it is made only once every several years.
Also, the gift will come to the charity from the Fund, not from an individual. This could maintain anonymity in making a gift, if that is what you choose to do. To the charity, this may present a challenge in its donor relations and in knowing where its contributions are coming from.
Finally, Donor Advised Funds are excellent ways to involve generations of your family in giving and philanthropy. You can appoint your children as advisers or successors to the fund. They can contribute money to the family’s DAF, and participate in family discussions of where to make contributions and grants – training a next generation in responsible giving.
There are important risks to understand and plan for. Once money is donated to a DAF, you cannot get it back out. You should not donate money to a DAF that is necessary to live on in the event of a negative financial event.
It is also essential that you discuss the particular DAF with your financial advisor. Some funds are set up to benefit a single cause or group of causes. Be sure the fund you select has the flexibility of giving to the churches and charities that you want to support.
There are usually minimum initial contributions, but these are coming way down as investment companies adjust to the new needs of donors under the tax laws. There are internal fees for management and record keeping, although these should be paid for out of fund income.
Donor Advised Funds have been around since the Great Depression, but the tax laws have made them newly popular. You should think of a DAF as a Family Foundation, like those established by the very rich, only without the IRS application, the regulations, and the annual reporting. If you have any questions about Donor Advised Funds, please feel free to contact our office.