What’s so great about a Donor Advised Fund?

By Kristine Loomis, CPA, CVA, Managing Principal, Cordell Neher & Company

In a recent meeting, I suggested a client consider opening a Donor Advised Fund and they asked, “what’s so great about them?”. I mentioned they were a great option for charitable giving flexibility in tax planning, and we moved on.

But as I consider the overall grandness of the Donor Advised Fund, it is important to know that they offer something for nearly every giver.

As a result of the most recent tax reform, the standard deduction was increased to $24,000 for married couples and $12,000 for singles. At those levels, many of us are unable to itemize our deductions and our charitable contributions no longer help us for tax purposes. While none of us are charitable purely because we get a tax deduction, the tax deduction is an incentive for us to give consistently, or perhaps just a little bit more.

Using a Donor Advised Fund to “stack your donations” is an effective charitable giving opportunity which allows you to make multiple years’ worth of annual donations in one tax year.

When taking advantage of this tax option, you deduct the donation in the year of the gift on your tax return. You then have flexibility to have the invested money sent to the charity(s) of your choice, in the year of your choice.

For example, you could donate $24,000 to a donor advised fund in 2019 and then send $8,000 per year for the next three years to the charity(s) of your choice. The tax deduction would be taken in 2019 for the donation made to the donor advised fund plus any other itemized deductions (property taxes, sales tax, and mortgage interest) and the charity(s) would receive a donation over the next three-year period according to your specific instructions.

This tax planning technique can be particularly beneficial in a year in with significant tax events, such as a large IRA distribution, ROTH conversion, sale of an appreciated asset, or a large bonus. Not only do you get the benefit of the tax deduction, you get the deduction at a higher tax rate.

In addition to charitable donation stacking, your donor advised fund (which grows over time) allows for purposeful giving as a family and allows you to pass along a legacy of charitable giving to your children. By investing in their donor advised fund, you will benefit from the tax deduction and have the option to donate to any qualified charitable organization on your own schedule.

Using the Community Foundation of NCW’s Donor Advised Fund gives you the opportunity to maximize the benefits of charitable giving. It’s easy, effective, and controlled giving with tax benefits. You can even make your donation anonymous if that’s your preference.

I encourage you to speak with your CPA, lawyer, or financial planner about these charitable giving options and how they can benefit you and those causes you care about!

Tax Efficient Giving: IRAs and Qualified Charitable Distributions

By Scott Blaesing, CPA, CFP Principal Cascade Wealth Advisors Inc.

If you are age 70½ or older, IRS rules require you to take required minimum distributions (RMDs) each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and may also reduce your eligibility for certain tax credits and deductions. To eliminate or reduce the impact of RMD income, charitably inclined investors may want to consider making a qualified charitable distribution (QCD).

A QCD is a direct transfer of funds from an IRA custodian, payable to a qualified charity, as described in the QCD provision in the Internal Revenue Code. Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000, and can also be excluded from your taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later.

If you take the RMD as income, instead of as a QCD, your RMD will count as taxable income. Having higher taxable income can directly impact your eligibility for certain deductions and credits. For example, your taxable income helps determine the amount of your Social Security benefits that are subject to taxes. Keeping your taxable income level lower may also help reduce your potential exposure to higher ordinary and capital gains income tax brackets, net investment income tax and Medicare surtax.

In my semi-annual tax and financial planning meetings with clients, I frequently hear that a priority is to decrease their annual tax burden. The reality is that their fixed sources of income from Social Security, pensions, investments and IRA distributions require them to recognize more income than they need to cover retirement living expenses. It’s great to be in this position, but tax inefficient and you lose control over where and how your assets are being used. READ MORE…

Community Foundation of NCW | 9 S Wenatchee Ave, Wenatchee WA 98801
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