If you’re charitably minded, you might still remember the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA made it more difficult for some individuals to receive tax benefits for their charitable giving.
While changes enacted by the TCJA remain in effect, there are still ways to make donations and receive tax benefits. It may just require additional planning. One of the most common methods under current tax law is to use a donor-advised fund (DAF). These giving vehicles date back to the 1930s and have become increasingly mainstream in the past few decades.
So, what are they and what do they do?
A donor-advised fund is an investment account for the sole purpose of supporting charitable organizations you care about. You make donations to the account, and once it’s funded, you can use the account to make grants to your desired charities. Along the way, the initial donation(s) can be invested and will (hopefully) grow, which means your causes could receive more money over time.
Now, let’s look at how the TCJA changed the tax benefits of giving to charity, and how donations to donor-advised funds are treated. Essentially, by increasing the standard deduction (among other changes), the TCJA made it more difficult to claim any benefit for charitable contributions. If you previously gave $5,000 per year to your favorite charity, you may have been able to deduct that amount from your annual income. After 2017, however, this is likely not the case unless you have other large deductions you can itemize.
A donor-advised fund allows you to lump donations together in one year by making one large donation to the DAF, then making annual grants to the chosen organization(s) over time.
Building on the example above, let’s say John and Jane give $5,000 to their favorite charity at the end of every year, but their other itemized deductions are minimal. Since their 2024 standard deduction is $29,200, they’re unable to use this charitable gift to offset any of their income. However, if they are in a position to do so and they donate the next 10 years of planned giving ($50,000) to a donor-advised fund this year, their itemized deductions reach $50,000 (plus anything else they could claim in 2024). They can now take a deduction for their gift and offset more income than they otherwise would have been able to with the standard deduction alone.
Taxes are just one of the benefits of a DAF, as not all $50,000 must go to their favorite charity in one year. They could choose to stick to their annual grant amount every year, or raise and lower the amount at their discretion. Further, if they find a different cause that speaks to them at some point, they can redirect their giving to a new organization.
The choice to use a donor-advised fund is a big decision, as donations are irrevocable (just as if they were given directly to your favorite organization). It’s always a good idea to speak with your accountant or financial adviser if you think starting a donor-advised fund sounds like a good fit.
