If you strive to give to charity each year, but have variable income, a donor advised fund could be a good fit for you. Donor advised funds allow you to take a tax deduction today for funds set aside for future donations. Once money is put into the donor advised fund, it can only be sent to charity. We can open donor advised funds can be opened with an initial contribution of $5,000 or more.
Donor advised funds may be a good fit for you if:
They are unlikely to be a good fit if:
Each year you have the choice to take either a standard deduction or to itemize your deductions. If you make a charitable donation but do not itemize, your donation does not reduce your taxes. If you have a small, or no, mortgage and give the same amount to charity each year, your deductions might look like this:
Total Deductions if Itemized
E=Greater of C & D
Tax Impact of Deduction
This hypothetical person donates to charity each year, but still takes the standard deduction. They do not receive any marginal tax benefit from their donations.
In contrast, someone who bunches donations is more likely to itemize in one year and take the standard deduction in later years.
These two hypothetical people give the same total amount to charity over five years, but in the first year the donation-bunching second hypothetical person pays less taxes than the first person. In later years, they pay the same amount.
This bunching strategy does not require a donor advised fund. You could give multiple years’ worth of donations directly to a charity today. However, if you like to give to charity each year, you can contribute multiple years of donations to a donor advised fund today and send the money from the fund to the charity of your choice in future years. This allows you to spread your gifts but bunch the tax benefits.
Contact us today at 925-300-3222 for a free initial financial planning consultation to determine whether a donor advised fund and/or donation bunching could be a good strategy for you and for the charities you care about.
Disclaimers: The hypothetical calculations in this article are for illustrative purposes only and should not be relied upon as tax advice. Investment and gifting strategy require a comprehensive understanding of a household’s finances.