If you’re like many taxpayers, you’ve been taking a fresh look at the role your itemized personal deductions play on your tax return. Since the Tax Cuts and Jobs Act (TCJA) of 2017 significantly raised the standard deduction ($14,600 in 2024; $29,200 for those married filing jointly), many taxpayers who used to get a healthy deduction for charitable contributions have found that their standard deduction actually exceeds what they could do previously.
Historically, one of Americans’ favorite personal deductions has been the charitable donation, and many organizations were concerned that with the elimination of the financial incentive, charitable donations would plummet. However, most people did not cease caring about and supporting the causes that are important to them, just because the tax law changed. In fact, there are several strategies that you may want to consider in order to both maximize your support for your favorite causes and minimize your tax bill.
One of the most popular tools used by those who are charitably inclined is the donor-advised fund (DAF). These funds were first created in the 1930s, and Congress established their current legal structure in 1969. You can think of a DAF as a charitable investment account to which you can make periodic deposits and then direct grants to specific qualified charities you wish to support. Another advantage of a DAF is that, unlike many individual charities, they are able to receive not only cash gifts, but also appreciated stock, real estate, and, in some cases, private equity and insurance.
This means that you can use a DAF as your “charitable giving bank,” making large donations that are immediately tax-deductible when it makes sense for you, and then directing the funds to be given to various charities of your choosing. Additionally, DAFs invest the assets you give, thus leveraging them for maximum benefit over time.
There are a few caveats that potential donors to DAFs should be aware of. First, gifts to a DAF are irrevocable. Just as you would not make a donation to your favorite charity and then ask for the money to be returned, once you make a donation to a DAF, you can’t later change your mind and reclaim the funds. Also, all DAFs are not created equal. Here are a few considerations to think about when choosing a DAF:
- Minimums. The minimum amount required to open an account can vary. Make sure you are considering a DAF that fits your situation and requirements.
- Fees. There will be costs associated with administering and investing your funds. Make sure you understand the cost structure before you make a gift.
- Assets accepted. Most DAFs will accept in-kind donations of stock, in addition to cash. Some, as mentioned above, will accept real estate and other asset types.
- Granting policies. The flexibility of grant-giving policies varies among DAFs. Certain DAFs—typically those sponsored by particular charitable entities—require that a certain percentage of gifts go to their cause. Others may specify gifts to local causes or charities of a certain category. Some may have requirements for minimum or maximum grants or the frequency of grants. Some feature simple-to-use, online interfaces, and others are less automated.
- Investment policies. The assets in DAFs are invested so that they can grow over time, and the nature of their investments can vary widely. Some allow more donor control over investment policy, and some permit less or none. Some DAFs will permit your personal wealth advisor to manage the assets you gift to the DAF; others will not.
- Transfer and liquidation. Some DAFs allow you to name a successor who will make grants and carry out other activities related to your bequest following your death. Some, however, will distribute any remaining assets at your death according to your past gifts, and others will roll your remaining assets into their general endowment. You may also want to determine whether the DAF will permit you to transfer your gifted assets to another DAF. Some do, and some don’t.
DAFs offer special advantages to taxpayers who want to “batch” their contributions: instead of making smaller contributions annually, they may want to accumulate their contributions and make a large donation in a single year. Their itemized deductions could then potentially exceed the standard deduction they would otherwise be able to take. For example, someone who typically contributes $1,000 per year to a particular charity might instead pool the funds for ten years and make a contribution of $10,000. Ideally, this approach, combined with other itemized personal deductions, would give the taxpayer an extra-large deduction schedule for that tax year. Then, they can direct the DAF to distribute the funds to their chosen organizations over a period of several years, if desired.
One additional regulation bears mentioning. The IRS can’t prevent taxpayers from lumping several years’ worth of contributions into a single year and taking the full amount as a charitable deduction, but the agency does enforce how and to whom the distributions from the DAF are made. A proposed change to Internal Revenue Code Section 4966 would create a tax penalty on any donation that are made to disqualified entities—that is, a recipient of the donation that is a family member of the donor, a related person, or a board member of the fund. In addition, all donations are required to be awarded on an objective and nondiscriminatory basis according to procedures specified and approved in advance. The tax penalty would amount to 20% of the amount granted, and the donation would have to be returned.
At Mathis Wealth Management, we know that many of our clients are interested in providing financial assistance to the causes and organizations they care most about. We want to provide helpful, authoritative information so that they can make the right decisions for their situation. To learn more, visit our website to read our recent article, “Year-End Gifting for 2024: Some Important Considerations.”
