For many, giving back to the community is a meaningful way to pay it forward and leave the world a better place. Donating either cash or assets to charity isn’t just a benefit to the cause you support – it can also come with tremendous tax benefits when you support a qualified charity through tactics like donor-directed charitable funds.
Ready to dive in and make a difference? Here’s how you can leverage the power of donor-advised funds (DAFs) and charitable bundling to make a significant difference in the world around you.
Donor-Directed Charitable Funds
If establishing a financial legacy is paramount to your sense of fulfillment, you need to ensure that you utilize the correct vehicle to maximize gifts. Not only should the charities, universities, and churches that are near and dear to your heart receive some windfall, but you also want to make savvy money moves that let you enjoy the fruits of your hard work and support you through retirement.
This is where donor-directed charitable funds come in.
Donor-directed charitable funds (also known as donor-advised funds) are a tax-advantaged way to give back. DAFs permit you to donate almost anything you can imagine: cash, stocks, and any valuable assets you may own. The fund can then sell the items and you make the recommendation on where the proceeds should go.
Why should you give via a donor-directed charitable fund though?
First, most people like to give this way because it offsets their tax liability. When you give assets to the fund, they are generally available for an immediate tax deduction, which lowers the taxable income you are responsible for to the IRS.
Second, the assets can then be sold within the fund. This eliminates your need to pay capital gains tax on stocks that may have significantly appreciated since the initial investment. The money then grows tax-free until you recommend a grant to a qualified charity.
What is Charitable Bundling?
Of course, multiple strategies exist for maximizing your charitable giving. A simple and effective means of maximizing your tax deductions for the year is charitable bundling, also called donation bunching.
When you use this strategy, you essentially donate multiple years’ worth of charitable donations to your DAF at once.
This is beneficial because it means you can take the highest itemized deduction on your returns at the close of the year. This method only works if you will be giving significant assets to the DAF. If your giving comes in under the standard deduction, it may not make sense to itemize.
On the other hand, you might be able to soar past that standard deduction simply by bundling your donations over the course of two or more years. Keep detailed records of what you would like to give and how much it is all worth to determine if donation bundling is for you.
Keep in mind that you will need to maintain your focus for several years running. If you think that you may switch careers or have a significant cut in your income that would leave you short of your philanthropic goals, then charitable donation bundling might be something you put on the back burner until things even out.
How to Use a DAF for Charitable Bundling
Because there are no right and wrong answers when it comes to charitable giving, you may quickly realize that you have options for how to bundle your donations. Oftentimes, we recommend that clients use both a donor-advised fund and charitable bundling to keep track of their donations.
How can you utilize both to their maximum capacity?
Once you have a DAF established, you can contribute to it throughout the year rather than waiting until year-end to make a more sizable donation. You still get the benefits of offsetting your tax liability, and you can continuously make generous moves that you feel good about.
Any money set aside in a DAF is tax-deductible, even if you have yet to recommend it as a grant to the charity of your choice. As more money rolls into your bank account, you can continue to add funds to the DAF and count them all in a single tax year. So for instance, you can give five years of donations all at once and itemize to take the charitable deduction. Then, for the other five years, take the standard deduction and dole out ⅕ of the fund to your normal recipients. With a sizable fund, you start to make waves for the charities you hold close to your heart while making solid recommendations for spending.
Remember that you will need to keep all donation receipts for your taxes. It may be beneficial to enlist the help of a professional accountant knowledgeable about DAFs when filing taxes at the end of the year.
Establish Your Charitable Legacy Today
Are you ready to set up a donor-advised fund and leverage a bundling strategy to maximize your tax benefits? Talk with Magellan today to learn more about options available, including donor-advised funds and charitable remainder trusts.
We offer our clients comprehensive estate, financial, legal, and tax planning so that you can rest easy knowing your legacy is safe. Reach out today to learn about our services and our affordable ongoing financial management!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.