The holiday season and the end of another tax year is a good time to start planning charitable giving, as we think about those less fortunate than ourselves and issues that we’d like to impact.
As it happens, 2017 is the 100-year anniversary of the charitable tax deduction. The deduction was included in the War Revenue Act of 1917, which significantly increased top tax rates from 15% to 67% to help cover war spending. There was concern that increased tax payments would cause people to reduce their charitable giving. Congress addressed this concern by including the charitable tax deduction in the War Revenue Act.
The tax benefit of charitable giving could vary substantially, depending on the techniques used and impact of potential tax reform. However, we’re able to analyze and compare the various methods of giving. This will assist in determining tax impact so you could capitalize on the tax benefit.
Charitable giving usually involves cash because it’s the simplest approach; however, it could be an inefficient means of giving from a tax perspective. The best approach starts with talking with your tax and financial advisor team about what will work best for you. There are multiple options for giving assets, including gifts of appreciated securities, qualified distributions from your IRA, and charitable trusts. Knowing about your charitable giving vehicle options could help you give even more tax efficiently.
The two most popular charitable giving vehicles are donor-advised funds (DAFs) and private foundations.
DAFs allow you to gift cash, appreciated securities, and other appreciated assets to the charitable organization that runs the DAF (Schwab Charitable, Fidelity Charitable, and The Seattle Foundation, for example). That fund then gifts the value of your gifts, over a time period, to the charitable organization(s) you designated.
DAFs can be useful if you want to make a contribution and need a current-year tax deduction but would like time to decide where you want the money to go. You can make a gift now, and the DAF can hold the assets until you’re ready to have them distributed to a charity. (However, most DAFs do have a time limit as to how long they’ll let you go without making a charitable distribution.)
A private foundation is a not-for-profit organization generally created by a single, primary donation from an individual or a business whose funds programs are managed by its trustees or directors.
A private foundation gives the donor much more control than a DAF does. A private foundation can hire and compensate staff, including family members of the primary donor, and the organization’s board has full control over grant making. For example, a private foundation may make grants directly to individuals facing hardships and emergencies, such as victims of hurricanes or wildfires. A DAF requires that giving be channeled through a 501(c)(3) charity, such as the American Red Cross.
DAFs Versus Private Foundations
There are some important differences between DAFs and private foundations. The rules are complex and outcomes can vary, but below are some of the typical differences. Your advisors can help you determine which will best achieve the impact you wish to have.
We’re Here to Help
As you think about your 2017 year-end giving, contact your Moss Adams professional to help you determine how you can best achieve your charitable goals.