How to Save Money With a Donor-Advised Fund
By Daniel Baumgartner & Petra Peters
Would you like to save money on taxes and contribute to charitable causes at the same time? If so, then investing in donor-advised funds may be a good option for you. By donating to these funds, you can lower your taxable income and subsequently reduce your tax burden, while also supporting causes that matter to you. It’s a win-win scenario that could help you make the most of your charitable giving. Here’s what you need to know.
Charitable Giving and the Tax Cuts and Jobs Act (TCJA)
If you’re charitably inclined, you’re probably used to itemizing your deductions. However, with the increased standard deduction and the limit on deductions for state and local taxes, you may not have received as much of a tax benefit for your giving in the past few years since the TCJA went into effect in 2017. With this new law, your tax benefit for giving to charity has now been reduced by more than 30%. The donor-advised fund is a way to mitigate some of those losses while still making an impact through giving.
Donor-Advised Funds: What Are They?
This is why donor-advised funds (DAF) are gaining popularity. A DAF acts as a philanthropic savings account. You put money into it to give to charity and let it sit there until you are ready to give. Unlike a savings account, though, all contributions are irrevocable. Once you put an asset into a DAF, you can’t take it back.
Because you can’t take back your contributions, they are considered complete charitable gifts and immediately tax-deductible. You can take the tax deduction right away even if you wait several years to pass the money on to charity. Though you don’t technically retain ownership when you put money or assets into a DAF, you are still able to guide, request, and recommend where the money goes. You get to name your DAF account, advisors, successors, and beneficiaries, and the holder of the DAF makes the ultimate decision on where the funds go. If you’re worried about letting control of your money go, know that most DAF holders will honor donor wishes as long as the recommendation complies with legal and tax requirements and grant-making policies.
The Tax Benefits
DAFs offer several tax benefits. First, you get to take an immediate deduction when you contribute, even if the money has yet to be given to the charity of your choice. Any limit to the deduction you’re allowed to take depends on what kind of assets you contribute to the DAF.
Publicly traded securities are a popular asset to contribute to a DAF. This is because you can avoid paying long-term capital gains taxes and still deduct the fair market value of the securities (if held over a year). If you buy a security at $100 and put it in a DAF when it’s worth $200, you get to deduct $200 of charitable giving without paying taxes on the $100 in gains.
Contributions of long-term capital gain property, like appreciated securities, can be deducted up to 30% of adjusted gross income (AGI). For all other cash contributions, you can deduct up to 60% of your AGI. If your contributions exceed your deductible limit, you can carry them forward to the next tax year.
Also, all contributions can be invested within the DAF to grow tax-free. Once assets are in a DAF, they belong to a charity and are therefore exempt from taxes.
How They Are Used
Let’s take a look at an example. The 2022 standard deduction for a married couple filing jointly is $25,900, and $27,700 in 2023. Assume that you have been donating $15,000 per year to charity. When combined with your property taxes and mortgage interest, you have total itemized deductions of $31,000 each year. That means you only receive a tax benefit for $5,100 of your giving in 2022 and $3,300 in 2023. Your total tax deductions over the two years are $62,000.
Now, instead, imagine that you open a donor-advised fund in 2022 and contribute $30,000 to it to cover your charitable giving for 2022 and 2023. In 2022, you will have itemized deductions of $46,000 ($16,000 of mortgage interest and property tax combined with $30,000 contributed to a DAF). Then in 2023, you can simply take the standard deduction since you have no charitable giving to report. Your total deductions over the two years will be $73,700.
By utilizing a donor-advised fund, you end up with $11,700 more in deductions over the course of two years. If you are in the 24% tax bracket, that’s a tax savings of over $2,800. If you donate appreciated securities to the DAF, your tax savings will be even greater because you will not face capital gains tax on the disposal of the assets.
Want to Know More?
It’s important to continue supporting the charities and organizations that matter to you, regardless of any changes to tax laws. With the introduction of higher standard deductions, it might seem like donating to these causes won’t be as beneficial tax-wise. However, donor-advised funds offer a solution that allows you to still receive tax benefits for your charitable contributions.
At Terra Nova Asset Management, we would love to partner with you to help impact our world for the better, while also preserving and continuing to grow your wealth. If you are curious about donor-advised funds and want to see if they are a good fit for your financial goals, reach out to us today. You may contact us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
About Daniel
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside the office, he is a hobby landscape, and street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
About Petra
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially carefree life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.