The Tax Cuts and Jobs Act of 2017 made some significant changes in Tax law. One of the changes increased the standard deduction to $25,900 (for 2022) for married couples. This change has benefited many taxpayers and simplified tax preparation by eliminating the need to itemize deductions. Taxpayers can still itemize but many receive a larger tax benefit from the standard deduction. One drawback of the higher standard deduction is the inability to benefit from your annual charitable deductions. Donor Advised funds can be a solution to this drawback.
Donor Advised Funds are the fastest-growing charitable giving means in the United States because they are one of the easiest and most tax-advantageous ways to give to charity. We recently had the opportunity to work with a few clients using a Donor Advised Fund.
In our first example, the client sold his business and wanted to set aside funds to give to charitable causes over the next five years. By placing the amount he wanted to give over the next 5 years in a Donor Advised Fund, he was able to take an immediate tax deduction for the full amount of the gift used to offset the gain on the sale of the business. He then can disburse the funds to charities over the next five years from the Donor Advised Fund.
In our second example, the client was giving $10,000 each year to a charity. When combining their annual gifting with other itemized deductions they did not have enough deductions to exceed the $25,900 standard deduction. Therefore, they received no benefit from charitable giving. We recommended taking the next ten years of gifts and placing the money in a Donor Advised Fund. The client would then receive an immediate tax deduction for the full contribution to the Donor Advised Fund and can disburse the funds to the charity over the next ten years.
There are limitations on the use of a Donor Advised Fund so if you or someone you know would like to determine if they would benefit from a Donor Advised Fund, please set up a time to meet with one of our Wealth Managers.