How to Set Up Charitable Contributions for the Long Term
Are you charitably inclined?
The most dramatic phenomenon in American charity in the last decade has been the rise of donor-advised funds, according to the Chronicle of Philanthropy.
A donor-advised fund can be viewed as a savings account for charities. Instead of contributing yearly to a charity, you can instead deposit the amount of money you might donate over the next several years now into a donor-advised fund and earn the cumulative tax deduction benefit during that one year. While doing that, you retain the flexibility to spread the donations over many years. Along with the tax deduction, donor-advised funds also provide the benefits of avoidance of capital gains on appreciated assets, and low administrative costs.
Donor-advised funds allow givers to make immediate deductible charitable contributions without having to choose a specific charity at the time that the donation is made. As long as you itemize deductions on your income tax return, you can write off the amount you contribute to the fund as a charitable contribution for the year you make the donation. (Deductions include up to 60 percent of adjusted gross income for gifts of cash and up to 30 percent of AGI for gifts of appreciated securities, mutual funds, real estate and other assets.)
Here’s an example of a situation in which a creating a donor-advised fund can benefit a university professional:
A professor who is retiring and receiving a buyout from the university will have a higher-than-usual income for the calendar year. Our approach is to lump about 10 years of charitable contributions that he and his wife usually make into the current year, and get a big tax deduction so they can avoid the highest marginal tax rates. Then going forward each year, they’ll donate the same amount from the fund, while their income will be much less in the future years. Our approach is to make sure they achieve as big of a deduction as they can this year. This professor also has highly appreciated stocks as well, so those stocks would also be transferred into the donor-advised fund. They won’t realize any capital gains taxes on those stocks, and it will help to diversify their portfolio.
Because a donor-advised fund operates as a charity, stock in such a fund can be sold for no taxable gain, which is very beneficial. Assets in the donor-advised fund can still be managed like a portfolio. It’s very flexible and very easy to set up -- like setting up any other IRA account or investment account. It’s easy to work with, and cost-efficient compared to other options that might be available. It’s a very useful tool, especially if you’re in a high-income year and you need some additional tax deductions.
Standard deductions will be higher on next year’s taxes due to the 2017 Tax Cuts and Jobs Act, and you may not be able to use some of the itemized deductions you’ve had in the past. If you’re charitably inclined, one idea to consider is to lump contributions from multiple years into one year, via a donor-advised fund, to create an itemized deduction higher than the new standard deduction.
Filbrandt & Company provides comprehensive financial planning services for university professionals. Our proactive approach to financial planning services focuses on the individual goals and unique lifestyle you have as a university professor or physician. To learn more about donor-advised funds and how our comprehensive service helps professors at more than 50 campuses nationwide, schedule a no-obligation phone call.