Managing itemized deductions with a donor advised fundSubmitted by Financial Planning Solutions, LLC on November 15th, 2018
With the new tax law kicking in this year, lots of things are changing for taxpayers, including itemized deductions. Prior to 2018, taxpayers who itemized deductions were able to lower their tax bill with few restrictions. But now, with the new cap on deductions for state and local income and property taxes set at a maximum of $10,000, being able to itemize is not assured.
For many taxpayers it will mean that the new, higher standard deduction of $12,000 for single filers or $24,000 for married filers, will be the best choice. For others who have deductions totaling close to these amounts, they will have to do some careful planning.
One way to manage your gifts and still itemize your deductions is to utilize a donor advised fund. Many financial services and a few independent companies sponsor these funds that can act as a temporary holding spot for your charitable gifts.
With a donor advised fund, you can give cash, stock or other assets and receive a deduction for the gift. However, you can decide when to request that the donor advised fund makes the gift to your charity. It does not have to be the same tax year. This flexibility can allow you to more effectively manage the timing and amounts of your charitable deductions.
For example, if you have been giving $4,000 to a qualified charity every year but this year you’ll only have a total of $11,000 in itemized deductions including this gift, you won’t benefit from itemizing deductions. The $12,000 standard deduction (for single filers) will be the best filing option.
However, you could decide to make a gift of $8,000 to a qualified charity this year for a total of $15,000 in itemized deductions. Since this total is above the $12,000 standard deduction limit, you’ll be able to itemize and take the gift as a deduction.
With a donor advised fund you can give that $8,000 in a single year but disperse only $4,000 this year and another $4,000 next year.
So, a donor advised fund may allow you to continue giving to your favorite charity and also take a deduction for your charitable gifts.
While donor advised funds do not work for every situation, they can offer additional flexibility over traditional giving methods.
If you are trying to figure out if contributing to a donor advised fund makes sense for you, we recommend meeting with your tax advisor to estimate your tax profile BEFORE 2018 is over. That way, you can choose the best strategy given your particular situation.
Have questions about how to keep itemizing deductions for 2018? Contact your tax advisor or give us a call; we’re here to help.
Contributions and disbursements from a donor advised fund must meet the IRS requirements for qualified charitable contributions. Go to www.irs.gov for more information.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.