Over the years, John and I have observed that most people are quite generous—especially when it comes to helping nonprofit or charitable organizations.
Billions of dollars are donated to charities every year. We understand that many donors are motivated by the tax benefits they receive, but most consider the tax benefits as an after-thought.
These charities desperately rely on the benevolence of their patrons. Thankfully, Congress usually leaves the tax factors alone when it comes to tax revisions. However, there are always changes.
Here are a few you may need to know.
Among the big changes in the 2017 Tax Cuts and Jobs Act (TCJA) were new limits on standard and itemized deductions.
These limits and restrictions created new hurdles when planning deductions with tax advantages in mind. An exception was charitable deduction, which remained an option for individuals looking to create a donation for the charity of their choice.
When making a charitable donation, two avenues to consider are donor-advised funds (DAFs) and private foundations.
Donor-advised funds are established by public charities as a philanthropic vehicle; the donor can allow the donation to potentially grow over time and advise on grants from the fund (assuming compliance approval), all while having an immediate tax benefit for that initial contribution.
Private foundations offer total control in terms of the grants you’ve made and their distribution.
In contrast, a private foundation tends to be larger in size (sometimes in the millions of dollars) in comparison to DAFs (which can be set up with as little as $5,000) and generally represent a larger and less-flexible method of charitable giving.
How much can you give?
There are different tax considerations to keep in mind.
Your limit in contributing to a private foundation is 30 percent of your adjusted gross income (AGI) in the year you make that donation.
On the other hand, the same limit for a DAF is up to 60 percent of your AGI.
What about long-term appreciated marketable securities?
Your limit to a private foundation is 20 percent of AGI for the year of the donation. For a DAF, it’s 30 percent of AGI.
There are advantages to both private foundations and donor-advised funds, both in terms of tax deductions and the control that you may exercise over how the funds are disbursed.
However, you should also be aware that the IRS is on the lookout for those who may use the flexibility of donor-advised funds to create improper distributions, which may, for instance, directly benefit a donor’s family.
For this reason, among others, it’s best to have several conversations with a trusted tax and financial professional, who can both assist you in the creation of any such entity as well as help you manage your charitable giving.