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Primary Tax Benefits with Donor Advised Funds


Primary Tax Benefits with Donor Advised Funds

Recapping on what the donor advised fund or DAF is, the IRS website states that, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.

A donor advised fund (DAF) provides five primary tax benefits to the donor:

  1. Income Tax: You receive an immediate income tax deduction in the year you contribute to your DAF. Since AEF is a public charity, contributions immediately qualify for maximum income tax benefits. The IRS does mandate some limitations, depending upon your adjusted gross income (AGI):

  2. Deduction for cash – up to 50 % of AGI.

  3. Deduction for securities and other appreciated assets – up to 30 % of AGI.

  4. There is a five-year carry-forward for unused deductions.

  5. Capital Gains Tax: You will incur no capital gains tax on gifts of appreciated assets (i.e. securities, real estate, and other illiquid assets.)

  6. Estate Tax: Your DAF will not be subject to estate taxes.

  7. Tax-Free Growth: Your investments in a DAF can appreciate tax-free.

  8. Alternative Minimum Tax (AMT): If you are subject to alternative minimum tax (AMT), your contribution will reduce your AMT impact.

Other Tax Considerations:

  1. Donors can deduct the full market value of certain contributed assets, subject to the AGI limitations listed above. These assets include:

  2. Closely held stock (C-corp or S-corp); and

  3. Real estate

If congressional Republicans succeed in their efforts to lower tax rates, the tax deduction for charitable giving could become less valuable as soon as next year. That’s a reason you may want to accelerate some giving into this year if you know you will be itemizing deductions on your 2017 return.

But wait…don’t write those extra checks to your favorite charities just yet. A better bet might be to open an account with a donor-advised fund, such as the charitable units set up by investment firms including Fidelity, Vanguard and Schwab.

With these programs, you donate your money now and earn a tax deduction for the current year—but can wait till later to direct those dollars to the ultimate recipients. You can supersize your tax deduction for 2017 while sticking to your current schedule of annual gifts to your religious institution or other charities. You can open an account with Fidelity Charitable or Schwab Charitable with just $5,000; the minimum is $25,000 at Vanguard Charitable.

One thing to keep in mind when you give to one of these funds: “You can’t change your mind and take the money back,” Steffen says. You’ll also pay an administrative fee, such as 0.6% a year, on the balance in the account, in addition to investment fees. You typically can select among investment portfolios in which to have the money invested before you request grants to be sent to the ultimate recipients.

If you are inclined to speed up gifts into 2016 via a donor-advised fund, though, don’t wait too long. You may be able to open an account and make a deductible contribution for 2016 as late as the final week of December. That can include transferring appreciated mutual-fund shares or other securities held at the associated financial firm to its charitable arm.

But deadlines are approaching—and in some cases, already past—to donate securities held at another company. Deadlines for different types of assets are listed online by the Fidelity, Schwab and Vanguard charitable funds.

Always consult with your accountant and financial planner before making any decisions on potential tax deductions and investment programs; especially with the new tax legislation approaching. For more details or further questions on the rules and regulations on Donor Advised Funds for your securities, investments, or assets; please contact us at 618-997-3436 or email us at info@taxplanning.com.

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