With the holiday season here and the end of 2018 closing in, here's a last-minute reminder not to pass up an opportunity to give charitably and wisely.
Before the year's end, if you set up a donor-advised fund, or DAF, you gain control on the timing of charitable gifts and choose the securities to give.
With a DAF, you contribute securities or cash and claim the deduction that same year. The beauty is its flexibility: You don't have to make grants to charities the same day you put money in a DAF. Later on, you can pick when the charity gets the gift.
Of course, you give to charity not only to reap a tax break, but also to make a difference, and the DAF offers a unique opportunity in this regard. The DAF allows assets to be invested over time, giving the charity even more of a gift due to appreciation.
A DAF, planned properly, may also help reduce your tax bill. Let's say you usually give $5,000 each year to your favorite philanthropic causes, but your income—and, thus, tax liability—is unexpectedly lofty this year. You could bundle your giving, putting three years' worth of donations, or $15,000, into the DAF. That permits you to deduct $15,000 this year instead of just $5,000, and reduces your taxes owed. Disbursements from the DAF money to the charities can be made over the next several years, with the hope that it increases in value thanks to market growth, though, there are, of course, no guarantees.
A DAF may help lower capital gains tax liabilities. By donating appreciated securities held for more than a year and that are eligible for long-term capital gains tax treatment, you can take a deduction for the fair market value of the asset, including the appreciation, and avert capital gains taxes on that amount.
An example: You bought stock five years ago for $10,000. Today, it is worth $100,000. So, you owe tax on the $90,000 gain. Your capital gains tax rate is 15% (between $38,601 and $425,800—higher-income types pay 20%).
If you sold your stock and paid the capital gains, you have only $86,500 to donate to charity. But if you donate it to the DAF, you get an upfront deduction for the entire $100,000 value of the stock. You pay zero tax on it, and the charity gets more.
According to the National Philanthropic Trust, the number of individual DAFs surged by 60% in 2017, and 2018 is expected to show even more growth. Major custodians and brokerages all offer help getting started with a DAF and we too offer strategic guidance and can assist in any way.
With our hope that your act of charity repays you many times over, we wish you and yours all the best for the holidays.
This article was written by a veteran financial journalist. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.