By MHLC Supporter Nick Miller
Many individuals and families of moderate means have found that the new SALT deduction limits on their federal taxes have put a squeeze on their charitable giving. If you find that you no longer itemize your federal taxes, then your charitable contributions to important organizations like MHLC are no longer tax deductions. The sting of donating with after-tax dollars is causing a reduction in funds given to many not-for-profits.
An investment and charitable vehicle known as a Donor Advised Fund (DAF) may be a solution for your family. A DAF is a managed investment, much like a mutual fund. You work with your investment advisor to set up the fund, and then you make an irrevocable payment into the fund. That money is invested in the market according to your instructions and the parameters of the funds. You give instructions for the fund to make “grants” to qualifying charitable organizations. The key tax benefit is that you are making a single donation that is large enough to push you well into itemization (as opposed to a standard deduction). You get a tax break for the year that you contribute the funds to the DAF. But you don’t need to give all the money to the charities right away. It will stay invested and making returns, as you draw down the principal over multiple years of donations.
Here’s a very simple numerical example/comparison for an imaginary Tax Year 2019, and a few years thereafter.
Suppose, first of all, that the target sum of your charitable giving is $10,000 per year.
- In 2019, you fund the DAF with $100,000.
- In tax year 2019, supposing you have saturated your SALT, you have a $10,000 SALT deduction.
- Add $100,000 charitable deduction.
- Total itemized deductions are at least $110,000 (DAF plus SALT). Mortgage interests and any other charitable giving that year may add to this.
- This compares favorably to the $24,000 threshold needed to meet the standard deduction.
- That means that, effectively, $86,000 of your $100,000 comes off your net income, and you get a tax benefit based on your marginal tax rate for 2019.
- You instruct the DAF to make one or more “grants” totaling $10,000 to your favorite non-profits (e.g. MHLC).
- The fund makes payments, in your name or as you would like it ascribed, to the charity.
- In 2020, the remaining $90,000 has grown some, assuming you invested well.
- Each year you give instructions for further grants to be made by the DAF. You draw down the fund at your discretion over multiple years.
- It has zero effect on your taxes that year or any future year, until or if you decide to put more money into the fund.
- Assuming you are in the same situation as you were in 2019, you will probably take the standard deduction.
What’s not to like? Your charity gets your donation. You make the donation with mostly before tax money.
It’s not for everybody:
- It doesn’t make much sense for small amounts of funding. In our example, anything less than $14,000 gives you no tax benefit.
- It’s irrevocable. You can’t get the money back for personal use.
- You need to have a chunk of cash upfront.
- It’s good to do it in a high-income tax year.
- There are minimum sizes on each grant. No $10 grants to the local fire brigade.
- Details matter. There are other IRS rules, etc. that might affect you.
- There are limits on the grants. You can’t get anything in return: can’t buy tickets, fund your nephew’s college, pay off Aunt Gertrude’s mortgage, go to the Gala. The rules are essentially what the IRS charitable deduction rules state.
We love ours. For some of you, this is a ‘no-brainer’. It was for us. This blurb is by Joe Donor, not a paid or trained professional. If you would like to understand DAFs better, talk to your financial advisor. Your favorite charities need you! Our guy, Joseph Gravini, (email@example.com; 518-447-8462) was immensely helpful and made the process completely painless.