Cypress Wealth Services
December 2020
Times are changing; you don’t need me to tell you that. In addition to the monumental changes 2020 brought globally, don’t forget the tax changes that also affect you. It used to be that you could give generously to others and get a nice tax break as an added benefit. Even if you didn’t donate money for the sole purpose of saving on your taxes, it was a nice perk come tax time. Unfortunately, the new Tax Cuts and Jobs Act, with its higher standard deduction, causes a whole lot of people to lose out on all tax benefits associated with charitable giving.
But don’t worry! Thankfully, you can still receive tax benefits for your charitable giving. “How?” you ask. The answer is through donor-advised funds.
If you are charitably inclined, you are probably used to itemizing your deductions. However, with the increased standard deduction and the limit on deductions for state and local taxes, you may have not received as much of a tax benefit for your giving last year as you have previously.
Let me show you an example. Let’s assume that for both 2017 (pre-TCJA) and 2018 (post-TCJA) you and your spouse paid:
For 2017, your itemized deductions would total $31,000, which is $18,300 more than the standard deduction of $12,700 for a married couple.
However, for 2018, your itemized deductions would only total $26,000 because you can only deduct up to $10,000 of the state, local, and property taxes you pay under the new law. Also, the new standard deduction for a married couple was $24,000 for 2018, so your itemized deduction only totaled $2,000 more. Basically, you only get a tax benefit for a fifth of your charitable giving.
This is why donor-advised funds (DAF) are gaining popularity. A DAF acts as a philanthropic savings account. You put money into it for the purpose of giving to charity and let it sit there until you are ready to give. Unlike a savings account, though, all contributions are irrevocable. Once you put an asset into a DAF, you can’t take it back.
Because you can’t take back your contributions, they are considered complete charitable gifts and immediately tax-deductible. You can take the tax deduction right away even if you wait several years to pass the money on to charity. Though you don’t technically retain ownership when you put money or assets into a DAF, you are still able to guide, request, and recommend where the money goes. You get to name your DAF account, advisors, successors, and beneficiaries, and the holder of the DAF makes the ultimate decision on where the funds go. If you’re worried about letting control of your money go, know that most DAF-holders will honor donor wishes as long as the recommendation complies with legal and tax requirements and grant-making policies.
DAFs offer several tax benefits. First, you get to take an immediate deduction when you contribute, even if the money has yet to be given to the charity of your choice. Any limit to the deduction you’re allowed to take depends on what kind of assets you contribute to the DAF.
Publicly traded securities are a popular asset to contribute to a DAF. This is because you can avoid paying long-term capital gains taxes and still deduct the fair market value of the securities (if held over a year). If you buy a security at $100 and put it in a DAF when it’s worth $200, you get to deduct $200 of charitable giving without paying taxes on the $100 in gains.
Contributions of long-term capital gain property, like appreciated securities, can be deducted up to 30% of adjusted gross income (AGI). For all other contributions, including cash, you can deduct up to 60% of your AGI. If your contributions exceed your deductible limit, you can carry them forward to the next tax year.
Also, all contributions can be invested within the DAF to grow tax-free. Once assets are in a DAF, they belong to a charity and are therefore exempt from taxes.
Let’s return to our previous example and assume all your spending numbers will be the same for the years 2020 and 2021. The 2020 standard deduction for a married couple is $24,800 and we will assume it stays the same for 2021. If you continue to give and itemize as usual, then you will have itemized deductions of $26,000 each year. That means you only receive a tax benefit for $1,200 of your giving each year ($26,000 itemized minus the $24,800 standard deduction) and your total deductions over the two years are $52,000.
Now, instead imagine that you open a donor-advised fund in 2020 and contribute $20,000 to it to cover your charitable giving for 2020 and 2021. In 2020, you will have itemized deductions of $36,000. Then, in 2021, you can simply take the standard deduction since you have no charitable giving to report. Your total deductions over the two years will be $60,800.
By utilizing a donor-advised fund, you end up with $8,800 more in deductions over the course of two years. If you are in the 24% tax bracket, that’s a tax savings of over $2,000. If you donate appreciated securities to the DAF, your tax savings will be even greater because you will not face capital gains tax on the disposal of the assets.
We know that after a year like 2020, you could use some good news! Donor-advised funds make it possible to continue receiving a tax benefit for charitable giving even with the new higher standard deductions. If you are a generous giver (and want to continue being a generous giver) and you’d like to learn more about how a donor-advised fund can save you money on taxes, our team at Cypress Wealth Services is here to help. Set up an appointment by contacting one of our offices today.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs, and their experience and expertise act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert, CA, Tustin, CA, and Anchorage, AK, the firm serves clients across the country in Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.
