Did the TCJA Impact Donor Advised Funds?
posted Sep 13, 2018 by Paul Nadeau Jr., CPA, MST in the Global Tax Blog
For years, many have depended on donor advised funds or DAFs to donate to charity in a simple, flexible and tax efficient way. But how does tax reform impact DAFs and other charitable contributions? Read on.
A bit of background: Itemizing deductions vs. claiming the standard deduction
To lower your taxable income, you can either claim the standard deduction or itemize deductions. To itemize deductions on your tax return, you list out each deduction you qualify for and deduct the total amount from your adjusted gross income.
The standard deduction, on the other hand, is a fixed dollar amount based on your filing status and age that the IRS allows you to deduct from your taxable income.
Under the new tax law, the standard deduction nearly doubles for taxpayers, thus making itemizing less likely for a large number of individuals.
Who is likely to continue to itemize?
Due to the $10,000 cap on state and local tax deductions and increases to the standard deduction, $12,000 for single filers and $24,000 for married filers, fewer than 10% of taxpayers are expected to itemize in the 2018 tax year. This decrease in itemizing deductions will cause taxpayers to lose tax benefits associated with charitable giving, since you can only deduct charitable donations if you itemize. Check out our blog, The New Tax Law and its Impact on Itemized Deductions.
How does the TCJA Impact charitable giving strategies?
Essentially the TCJA enhanced the deduction for charitable contributions by raising the cash contribution limit per year. The limit is now 60% of adjusted gross income, up from the prior 50% limit. The per year limitation on donations of appreciated property remains unchanged at 30% of adjusted gross income. These limitations apply to donations to public charities. Donations to private foundations and other non-profits are subject to different limitations.
Additionally, the TJCA suspended the Pease limitation (which reduces itemized deductions for high-income individuals) for taxpayers with income over $261,500 (single filers) and $313,800 (married filers).
With the change to the standard deduction, many taxpayers may benefit from "bunching" their donations. Bunching is a strategy of consolidating tax-deductible donations that would normally be made over multiple years, into a single tax year. Using a donor advised fund is helpful with this strategy because the taxpayer can make the donations to the donor advised fund in year one to get the deduction, then distribute the funds to their normal charities over multiple years. This way the charity(ies) continue to receive their funding as they normally would, and the taxpayer realizes the tax benefit.
What is a donor advised fund?
A donor advised fund (DAF) also known as a charitable gift fund or philanthropic fund allows a donor to make a tax-deductible charitable donation to the fund, then recommend grants from the fund to a specific public charity or community foundation. The taxpayer receives a tax deduction in the year assets are transferred to the DAF, but can then wait to make charitable contributions to separate charities. DAFs were first established in the 1930s to enable charitably inclined individuals to set aside cash and non-cash assets and invest them for tax free growth until they designate them to specific charities. The donor to the DAF is considered an advisor that makes suggestions to the fund of what charities to make contributions to.
In many cases donating highly appreciated assets, such as low basis stock, to a DAF can be beneficial to the charitably inclined. Doing so can…
- Reduce the donor’s overall income tax liability,
- Eliminate capital gains tax, and
- Provide a larger donation to charity.
- For donors experiencing a high income year or planning for charitable giving in retirement, moving assets into a donor-advised fund will be advantageous because they will reap tax benefits during the high income years while building a long term charitable giving legacy.
- The AGI limit increase to 60% for cash charitable contributions and the repeal of the Pease limitation makes giving to charity more beneficial, for both the donor and the charities they support.
- For high-net worth individuals, donor-advised funds continue to be a valuable tool in a comprehensive estate plan.
Donor advised funds have grown in popularity over the years, due to the fact they can be established with minimal startup costs and offer immediate income tax deductibility. Given changes under the TCJA, those with donor advised funds have some unique advantages.
Questions on your charitable contributions after the TCJA? Contact any member of our Private Client Services Team.