The Tax Cuts and Jobs Act didn’t, for the most part, address charitable giving. However, several provisions are expected to have an impact on donors and charities.
The one likely to have the biggest impact is the increase of the standard deduction from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married-filing-jointly taxpayers.
Many people who previously chose to itemize deductions–including charitable gifts–may no longer benefit from doing so. Giving through a donor advised fund (DAF) may help you recognize the tax benefits of charitable giving even with the higher standard deduction amounts.
How a DAF Works
DAFs are somewhat like a holding account for charitable gifts. As a donor, you open and contribute to an account. The DAF itself is a 501(c)(3), such as Schwab Charitable or the Seattle Foundation. Once the money transfers, it no longer belongs to you; a completed charitable gift has been made and you receive a charitable deduction in that year.
You can then advise the DAF administrator to make charitable gifts from the DAF account. As long as the charity is a 501(c)(3), the DAF will make the gift, although, technically, it isn’t required to do so.
History of DAFs
The New York Community Trust created the first DAFs in 1931, but Congress didn’t establish a legal structure for them until 1969. DAF popularity increased in the 1990s when Fidelity received IRS approval to establish Fidelity Charitable.
In 2016, contributions to DAFs totaled $23.27 billion, according to the National Philanthropic Trust’s 2017 Donor Advised Fund Report. Grants from DAFs that year reached $15.75 billion. The required payout rate from DAFs is 5%, but the payout rates have consistently exceeded 20%.
There are several reasons to use a DAF instead of giving directly to a charity.
DAFs allow you to group several years’ worth of giving into one year. For example, if you generally give $5,000 each year to a charity, and fall under the $12,000 standard deduction, you can gift three years or more into a DAF all in one year, then gift $5,000 to charity from the DAF each year. (Read more in this article)
You can contribute your money to a DAF account, have the money invested within the account so that it grows, and then distribute that money out to charity over time. This is somewhat similar to a private foundation, but the DAF can be done with a smaller contribution
Additionally, if you plan to donate to a charity but had a hectic year—perhaps you sold your business or worked hard at a start-up and exercised vested options, you still have options. You can gift to the DAF by year-end, then choose a charity after taking time to research and consider your legacy.
Strategy for Capital Gains
Grouping several years of giving can be a particularly strong strategy if you have investment positions with significant capital gains. You can gift appreciated assets to a DAF, receive a charitable deduction for the fair market value of the stock or mutual fund—and don’t have to recognize the capital gains. As a not-for-profit, the charity doesn’t pay capital gains, so they can use the full proceeds from the gift for their mission.
Even if you don’t group your gifting, you can use the DAF to gift appreciated securities if your charity is smaller, doesn’t have a brokerage account, and is a 501(c)(3).
DAFs may also be able to accept complex assets, such as real estate or stock in closely held companies. Gifts of such assets prior to a sale can have significant tax benefits and be a very efficient way to realize charitable and legacy-based goals.
If the assets gifted to the DAF are appreciated securities, the DAF administrator will generally want to sell them and either use the proceeds to make gifts, or reinvest them in a diversified portfolio if you intend to hold the funds in the account for several years or more.
We’re Here to Help
Setting up a DAF at Schwab Charitable or Fidelity Charitable is easy, and you can link them to your investment accounts and transfer assets. To find out more about DAFs, and how tax reform may impact your plans for charitable giving, contact your Moss Adams professional. You can also visit our dedicated tax reform page to learn more.