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Due to changes related to the recently enacted tax reform, the standard deduction for individuals has increased from $12,000 to $24,000 for married filing joint taxpayers beginning in 2018. In addition, many of the itemized deductions available to individuals have been eliminated or limited beginning in 2018. Generally, individuals may claim the higher of the standard deduction or their itemized deductions for any given tax year.
One of the effects of these changes is that it has become more difficult for taxpayers to have enough itemized deductions to exceed the standard deduction beginning in 2018. As a result, those who contribute regularly to qualified charities may begin to see no additional tax benefit from their donations. A donor-advised fund (DAF) is a mechanism that can help taxpayers preserve the tax benefit while continuing to support their preferred charities. A DAF is like a charitable investment account. It allows a taxpayer to “bunch” charitable contributions in order to claim a deduction immediately. Individuals can donate cash or other assets held, and then direct the funds to the charitable organizations of their choice in future years. Growth within the DAF is tax-free, creating additional amounts going to your preferred charity. Below is an example of how DAFs can maximize your tax benefit.
Without Donor-Advised Fund:
- John Smith is married
- Adjusted Gross Income (AGI) of $200,000
- Other itemized deductions totaling $10,000
- He donates $10,000 every year to his favorite charities
In 2019, John would claim the standard deduction of $24,000 since his itemized deductions add to $20,000, losing the additional tax benefit of his charitables. Assuming the same AGI and other factors for the next three years, his aggregate deductions would total to $72,000 (taking the standard deduction all three years).
With Donor-Advised Fund:
- John Smith is married and has the same AGI of $200,000
- Other itemized deductions of $10,000 from above
- Opens DAF and contributes $30,000 up front, which is representative of how much he was planning to donate over the next three years originally
In 2019, John’s itemized deductions ($30k + $10k) exceed his standard deduction ($24k) so John is able to claim the entire $30,000 of charitables. The subsequent two years he would only have $10,000 in itemized deductions so he would go back to claiming the standard deduction of $24,000. Aggregate deductions for the same three-year period now total $88,000 (itemized this year, standard the next two years). Using the DAF would save John from paying tax on an additional $16,000 over three years.
Contact your GBQ advisor to explore whether a donor-advised fund may be right for you.