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:
| Year |
Mortgage Interest A |
Chartable Donations B |
Total Deductions if Itemized C=A+B |
Standard Deduction D |
Deduction E=Greater of C & D |
Tax Impact of Deduction F=35%*E |
|---|---|---|---|---|---|---|
| 2018 | 3,000 | 5,000 | 8,000 | 12,000 | 12,000 | 4,200 |
| 2019 | 3,000 | 5,000 | 8,000 | 12,000 | 12,000 | 4,200 |
| 2020 | 3,000 | 5,000 | 8,000 | 12,000 | 12,000 | 4,200 |
| 2021 | 3,000 | 5,000 | 8,000 | 12,000 | 12,000 | 4,200 |
| 2022 | 3,000 | 5,000 | 8,000 | 12,000 | 12,000 | 4,200 |
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.
This commentary reflects the personal opinions, viewpoints and analyses of the Integrity Wealth Partners, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Integrity Wealth Partners, LLC or performance returns of any Integrity Wealth Partners, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Integrity Wealth Partners, LLC manages its clients' accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
