With our crazy Missouri weather, we have recently experienced both winter and a touch of spring in the same week. Come on spring! With April 15th just around the corner, tax season is also upon us. For those who have already filed taxes for 2019, you may have found that with this year’s standard deduction of $12,400 for individuals and $24,800 for married couples, it’s becoming more challenging to itemize your deductions.
While the higher standard deduction has not brought about the dramatic decline in charitable giving that was predicted, it has changed the tools and strategies that people are using to reach their philanthropic and financial goals. One change we’ve seen at Truman Heartland Community Foundation is an increase in the popularity of Donor Advised Funds. Like a charitable savings account, a Donor Advised Fund is just like having your own private foundation – only better and much simpler. In addition to helping you become more organized and strategic with your charitable giving, a Donor Advised Fund, when coupled with a “bunching” strategy, provides a way for you to maximize the tax benefits of your giving.
Gifts to a Donor Advised Fund are immediately tax deductible, so with a “bunching” strategy, you can use your Donor Advised Fund to contribute multiple years’ worth of donations in one calendar year in order to exceed the standard deduction in that year. You then continue your regular support of your favorite charities through grants from your Donor Advised Fund, and in the years you don’t bunch, you claim the standard deduction.
For example, let’s take a couple with state and local tax deductions plus mortgage interest deductions that total $15,000 per year. They’re charitably minded and currently donate $7,000 to support their church and favorite nonprofits. As such, they have $22,000 total in itemized deductions. Since the standard deduction is now $24,800, they cannot itemize. However, if they use a Donor Advised Fund to bunch their charitable giving and put three years’ worth of contributions, or $21,000, into their fund, then they would have $36,000 in deductions this year and could itemize and receive the additional tax savings. In the next two years, they would take the standard deduction on their tax return. They can continue to donate their typical $7,000 each year, but by bunching contributions and using their Donor Advised Fund to make grants to charities, they can still benefit from a larger charitable deduction in year one. The funds in their Donor Advised Fund are invested and will have the opportunity to grow tax-free, resulting in more money available to support their church and the causes they care about.
Additionally, a Donor Advised Fund offers an opportunity to maximize the power of your charitable contributions with gifts of non-cash assets. By donating appreciated securities, such as stocks and mutual funds directly to a fund (instead of selling the security and donating the cash), you can gain considerable tax advantages and make the most charitable dollars available to grant to charity. And with a Donor Advised Fund as the receiving charitable entity, you simplify the process by not having to do multiple transactions with multiple charities.
Talk to your financial advisor and do some tax planning now to ensure you have the most effective charitable giving plan to minimize your 2020 taxes and maximize your giving. Waiting until later in the year may keep you from taking full advantage of this tax-saving tool. So, while we may have to wait patiently for spring to arrive, now is the time for tax planning for 2020.