The holiday season is always a popular time for giving to worthy causes and to those who are less fortunate than we are.
It seems like the natural thing to do around Christmas and research appears to confirm that with about 30% of annual giving taking place in December. Studies even say that the simple act of giving makes us happier.
The benefits of charitable giving can also carry through to the following year when we see a lower tax bill. But these days, tax advantages from charitable giving are harder to manage than they used to be.
The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction for individuals and those filing jointly. As a result, donors must give significantly more to receive tax deductions that are greater than the new standard deduction, prompting many to reconsider their philanthropic strategies.
But changes in the law should not stop us from giving to those great causes that depend on our generosity. A long-standing investment vehicle established by the Tax Reform Act of 1969 provides a strategy for donors to keep giving without surrendering their tax benefits. Seldom used in the 1970s and ’80s, Donor-Advised Funds (DAFs) picked up popularity in the 1990s and gained more interest when the Tax Cuts and Jobs Act became law.
Think of a DAF the same way you might think of a foundation. They both take contributions; they both invest the money and they both distribute grants to various charities over time. The difference is that DAFs are owned by individuals or families and they do not need the staff, the overhead, and the regulatory oversight that foundations require.
Once a DAF is established, donors can receive immediate tax deductions from their contributions. When assets are transferred into a DAF, they can grow tax-free, but the contributions are irrevocable, which means they can only be used for grantmaking. However, they are easy to manage and donors can make grants in any given year to virtually all IRS-qualified public charities.
Now, the strategy gaining in popularity due to the new tax environment is bundling charitable gifts every two years. By utilizing a DAF, donors can reap a greater tax benefit when they itemize their tax returns and bundle their DAF contributions every other year. In off years, donors can then take the standard deduction and hold their charitable donations, allowing them to accumulate for the next tax year.
In addition to its tax advantages, a DAF can provide a more deliberate approach to charitable giving. Members of the entire family can be included in grantmaking decisions. Some families name their DAFs, and even write mission statements to help guide them across years of giving. For those focused on leaving a legacy, this can be an incredible way to impart a family’s core values to the next generation.
Before setting up a DAF, consult with a tax adviser and a Registered Investment Advisor to help with the process. Their training, experience, and commitment to act in their clients’ best interests will help ensure a successful outcome.
So, in the midst of the holidays, a DAF may be the key to a more meaningful and tax advantageous charitable giving strategy. So, go ahead and give this Christmas. It will be good for the community, good for your tax bill and it’s likely to make the season a little merrier for you.
Tyler Grubbs is an accredited investment fiduciary, providing financial advising services at Oklahoma City-based Full Sail Capital, working with individuals, families, and companies of all sizes to implement financial planning strategies.