In 2017, about 30 percent of tax filers itemized deductions. That number could plummet to 10 percent under the new tax law, according to the nonpartisan Tax Policy Center. With fewer taxpayers having an incentive to itemize, the philanthropic community worries that charitable giving —which reached a record $410 billion in 2017—could crash.
But that’s not the likely outcome. For those who do continue to itemize, the new tax law offers several opportunities, including the ability to bunch several years of charitable contributions into a single tax year. (We will be discussing this and other tax planning strategies at our upcoming third annual speaker series event in Seattle on October 10th. To learn more about the event, please click here.)
For non-itemizers age 70.5 and above, an increasingly popular strategy has been to send a portion of required minimum distributions (RMDs) from their IRAs directly to charities, thus avoiding taxation on that portion of the IRA distribution.
More popular yet is something called the donor advised fund, which allows you to control your own mini-foundation in Bill Gates-fashion. In 2015, one such fund sponsored by Fidelity surpassed the United Way to become the largest recipient of charitable funds in the United States.
Conlon Dart frequently helps clients weigh the pros and cons of establishing their own donor advised funds. One of the principal benefits we discuss is that for those who itemize, the charitable tax deduction is taken in the year the donation is made to the fund, rather than the year the fund transfers it to a charity. That allows taxpayers to make contributions to the donor advised fund for several years, letting the money grow in a selection of stock and bond funds before deciding which charities most deserve their help.
Most donor advised funds have a minimum starting balance of at least $5,000. People fund them in a variety of ways. We’ve seen many donors make one-time contributions, while others give a set amount every year.
We came across an interesting read in The Atlantic that outlines the donor advised world quite well. The article also discusses one potential downside. According to this argument, as the donor advised fund pool becomes bigger by the year, donors will increasingly allow their contributions to grow, rather than sending money to charities that need it right away.
While this may be a compelling argument for some, it is not one we are terribly concerned about. Most donor advised funds allow donors to name designated charities as beneficiaries upon their death, ensuring the eventual distribution of assets. Moreover, someone who goes to the trouble of establishing a donor advised fund clearly has more in mind for their gift than receiving a tax deduction.
If you would like to learn more about donor advised funds or other tax strategies, don’t hesitate to talk with your Conlon Dart advisor. In the meantime, we hope to see you on October 10th and don’t forget to RSVP.