Americans are by nature, charitable beings. According to the Charities Aid Foundation’s World Giving Index, which studied the charitable activities of citizens from 128 countries over the course of a decade, Americans rank the highest, compared to other countries, when it comes to the percentage of citizens who donate money to charity, volunteer for charitable organizations, or who’ve claimed to help a stranger in a time of need. A Gallup poll taken in mid-2020, during the height of uncertainty surrounding the COVID pandemic and what the future held, showed a staggering 73% of Americans reported donating money to a charitable organization that year. It is clear from this data that charitable giving is important to millions of Americans, but are these givers getting the most bang for their buck from these donations?
While it can be easy to make a one-off donation to your favorite charity, or to drop a few bills into the collection plate, these kinds of donations are oftentimes not the most tax-efficient method of charitable giving. For many taxpayers, the Standard Deduction amount ($25,900 for married filers and $12,950 for single individuals in 2022) far exceeds itemizable deductions, and only $300 of charitable gifts can be deducted per person for those who do not itemize their tax deductions, meaning any tax benefit beyond the first $300 of gifting is lost.
One technique that many investors have started to utilize to make the most of their charitable activity is utilizing a Donor-Advised Fund (DAF). A DAF is an investment account that is created for the sole purpose of making charitable distributions to qualified charitable organizations of your choosing. The way a DAF works is that you fund the account with cash, real estate, appreciated stock, and/or even artwork. You would receive an itemizable deduction (limited to a percentage of your Adjusted Gross Income or AGI) for the contribution. Once the funds have settled in your DAF, you can identify specific charities and start to make gifts as frequently or as infrequently as you would like. You do not have to gift all the funds in the account to charity in the same year that they were contributed into the DAF, you can carryover funds into the next year or beyond.
With normal individual gifts to charity or cash gifts, you must deduct the donation in the year in which you make the gift, and you also need to maintain contemporaneous records of the gift details including receipts. With a DAF however, the initial funding of the charitable account is the tax-deductible event, NOT the individual donations to charities. This allows a charitable investor to make an aggregate deposit to a DAF and take a full itemized deduction for that amount. The donor also then has the luxury of distributing the funds to charities at their leisure, they do not have to scramble to get donations in by the end of the year.
For example, an investor could contribute $20,000 into a Vanguard Donor-Advised fund in November of 2022 and receive a $20,000 deduction for 2022 for this contribution. The investor can distribute all of the funds or no funds to charities in 2022, as they only need to make one grant every three years at a minimum. This gives the charitable investor much more freedom to donate at the frequency or rate that they would like and allows for more efficient tax planning around charitable giving. Additionally, an investor can fund the account easily via a contribution of appreciated stock contribution. Contributing these appreciated shares and removing them from the portfolio can also lead to savings in terms of Long-Term Capital Gains that the investor would otherwise pay taxes on at the time of the sale.
While there are some stipulations around setting up and using a DAF, making your charitable gifting through a DAF can increase the benefits of the same donations you may already be making or intending to make. If you are interested in learning more about how utilizing a Donor-Advised Fund can benefit your financial plan, you should speak with your financial advisor about how a donor-advised fund may work for you.
About the Author:
Justin Seidenwand is an Associate Financial Advisor at Fullen Financial Group. He is a 2019 graduate of The Ohio State University, earning a Bachelor of Science in Consumer and Family Financial Services with a focus in Family Finance. Justin has years of experience in client-facing roles with an emphasis in relationship management, and he strives to help Fullen Financial Group build long-term relationships with clients and their families. While working to complete his education at The Ohio State University, Justin spent several years working in the telecommunications industry, and was also a formally-trained chef, attending vocational school for culinary arts while still in high school. In addition to his academic and professional achievements, Justin is also a six-year veteran of the Ohio Army National Guard, serving as a Military Police Sergeant in a team-leader capacity. Justin lives in Columbus, Ohio.