Donor Advised Funds: An Effective Planning Tool Under the New Tax Law
BY BEA ROSENBERG, CPA
In April, I completed my 21st tax season with DMLO CPAs. My career has spanned three decades, and I am continually amazed at how each tax year brings new challenges. This year’s challenge was coping with two different tax laws. While busy assisting clients with their 2017 tax returns, we were also helping them understand what they could expect for 2018 due to the year-end passing of the 2017 Tax Cuts and Jobs Act (TCJA). This certainly lent itself to a very unusual tax season.
The major goal of tax reform was to simplify tax filing. Provisions of the 2017 TCJA affecting all individuals include the elimination of the deduction for personal exemptions and the near doubling of the standard deduction. The loss of many itemized deductions will channel an even greater number of taxpayers to the new $24,000 standard deduction for married couples ($12,000 single taxpayers). For this reason, individual donors may want to be more strategic in their charitable giving by “bunching” charitable contributions in one year to exceed the standard deduction.
A donor advised fund (DAF) with the Community Foundation of Louisville can be an ideal solution. Individuals can use a DAF to combine 2-3 years’ worth of charitable giving into a single gift for income tax purposes in the first year. In the subsequent 2-3 years, they can take the standard deduction, but use the money in their DAF to recommend charitable contributions to their preferred nonprofits. This strategy can maximize a donor’s tax advantage and result in a total deduction over the 2-3-year period that is greater than it would have been otherwise.
To give you an idea of the potential tax savings: Assume I have a client (a married couple) who consistently gives $1,000 per month to their favorite charities each year. Under the new tax law, the $12,000 in annual charitable donations, combined with other itemized deductions of $10,000, will not exceed the $24,000 new standard deduction. Alternatively, if the couple contributes $36,000 in 2018 to a DAF, they can itemize their deductions (total $46,000) in 2018, then use the standard deduction in 2019 and 2020. The result: $94,000 in total deductions with the DAF, compared to $72,000 in deductions with annual giving. Using this strategy, the tax savings may range from an estimated $2,500 to as much as $8,000, depending upon the couple’s tax bracket.
Not only will this couple reduce tax liability by “bunching” their contributions, their DAF will be invested for long-term growth, and they and their future generations can recommend grants to the causes they care about.
The Community Foundation of Louisville offers two types of DAFs: one that requires a minimum gift of $25,000, offers four investment options and has a minimal fee; and one that requires no minimum gift amount, offers no opportunity for investment and has no fee. If you are interested in learning more about donor advised funds at the Community Foundation of Louisville, please contact Jennifer Fust-Rutherford, Director of Gift Planning, at 502-855-6953 or [email protected].
Bea Rosenberg is a Director with Deming, Malone, Livesay & Ostroff (DMLO) and serves as Chair of its Wealth Advisory Niche. Bea specializes in estate planning, estate & gift tax, and fiduciary & individual income tax. Prior to joining DMLO, she devoted over 15 years to developing expertise in this field within the tax departments of two local trust companies. Bea earned both a Bachelor’s in Accounting and Master’s of Business Administration from the University of Louisville, and is a licensed CPA.
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