Finance Friday- Year End Tax Strategies through Charitable Gifts

My family and I are charitably inclined and give to our favorite charities every year.  This year, with all that has happened, we believe it is even more important to support the causes that align with our beliefs.  What is a potential way we can give while also taking advantage of the tax deductions available to us?

We all are aware of the challenges 2020 has posed around the globe.  Many people are asking how they can help, whether it is through volunteering their time or resources to help those in need.  One unique aspect of the pandemic, and the resulting CARES act, is that an individual can contribute cash directly to a charity and deduct up to 100% of AGI (adjusted gross income) instead of the normal 60% cap for cash contributions.  Another method that has increased in popularity over the last few years is a Donor Advised Fund.  A Donor Advised Fund or “DAF” is a turnkey solution that allows a person to consolidate all their charitable contributions from one account, while also giving the donor the ability to invest the funds in a customized investment strategy.  A great feature of a DAF is you do not have to make charitable grants in the same year as your DAF contribution.  This gives the original funds time to grow and make a larger impact at a later date. This added time (funds are invested in DAF, but not doled out to charity all at once) can leverage the amount of your ultimate contribution in years when investment performance has been positive.  

A DAF is also extremely flexible on what you can contribute.  You can contribute cash, securities, privately held business interests, and even restricted stock.  We have found that for many, appreciated securities are a great option because they can avoid capital gains tax while still being able to deduct the fair market value of the securities as a charitable donation.  We have even incorporated a DAF giving strategy with an executive’s 10b5-1 selling plan, allowing the donor to give shares of their company’s stock, while receiving a powerful tax deduction.  

Once you make the initial donation to the DAF, you can liquidate the securities and reinvest the proceeds in a customized investment strategy until the time you make a grant to the charity or charities of your choice.  Donor Advised Funds are also great for years where you would like to “lump” your charitable deductions.  In high income years, you can make a large DAF contribution and then let the assets grow tax free until you want to make specific grants to the causes of your choice.  

Donor Advised Funds are a powerful tool for anyone who is looking to make a difference.  They are simple yet effective in consolidating your charitable donations while also giving you the power to potentially grow that asset base over time.  As 2020 has reminded us, there are many in need around the world and a Donor Advised Fund is a great way to support charities while maximizing your impact.