BLUF:

If you’re not charitably minded and would prefer NOT to help people, then you can stop reading now as this post is about how best to donate to worthy people and causes. Here’s the normal methods: one can send cash or a check, credit card donation, allotment to CFC (Combined Federal Campaign), tithing at church.  While these are all fine, we’re not here for just ‘fine’, we want to do it BETTER… and there’s a better way, the Donor Advised Fund (DAF) which allows you maximize donations to charity while minimizing taxes – Booyah!! Even better these are not just opportunities for the rich, they are the best means for the average Joe to be philanthropic.

Action:

Open a DAF- it’s Brilliant (yes, think Guinness)! Here’s the skinny: instead of sending after-tax money to a charity, with a DAF, you can send appreciated stock (i.e., investments that have grown in value) and you pay no capital gains tax, can take a tax credit for the entire amount given if itemizing, and then you choose when and what charities receive your grant and they pay zero taxes and gets all of the money…like I said, BRILLIANT! Schwab (https://www.schwabcharitable.org/) and Fidelity (https://www.fidelitycharitable.org/) have DAFs that everyone can start easily with no minimum contribution and minimum grants of $50 (i.e., minimum you can give in a single donation to a charity), Vanguard requires a minimum $25K which is far out of reach for many. When I started mine with Schwab years ago, both Schwab and Fidelity required min $5k, which is much better than Vanguard for the same expense ratio, but still was too high and I remember complaining to them at that they are keeping so many from helping based on such a high minimum.

How a DAF Works

Definition: As stated by the IRS, a DAF is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization (i.e. Schwab Charitable). Ok, so what’s it mean to me?

To get started one can open the account without funding it and there is no minimum balance to keep open at Schwab and Fidelity. When ready one can contribute funds to the account, but note that once you contribute – that money is no longer yours, it’s part of your DAF that can then be used to donate to 501(c)(3) charities of your choosing. You can contribute appreciated assets (stocks, real estate, etc.) that has been held for at least a year (long-term capital gains) for maximum tax benefit. If you contribute stocks with short-term gains (i.e., stock < 1 year), you can only make a tax deduction for the fair market value minus the appreciated portion of the stock. That will be explained with an example below under Optimizing Tax Advantages. Bottom line – contribute stocks with gains that you’ve held for at least a year. Once you contribute funds, the sponsoring organization sells your stock and then reinvests them in a diversified portfolio of varying risk based on questions you answer upon setting up the DAF. That money sits in various mutual funds inside the DAF until you decide what charities you’d like to donate to and when.

Optimizing Tax Advantages

 Contribute highly appreciated stock held for longer than a year to maximize the tax deduction, minimize the tax paid, and maximizing the donation to charity. How does that work? One can deduct up to 30% of their AGI (Adjusted Gross Income https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income) in a year for non-cash assets like appreciated stock and real estate, and IRS permits a carryover for five tax years. Enough with the specific rules on charitable giving amounts. Let’s see the various ways to donate to charity to show why using a DAF and contributing assets with long-term gains is the best for you and the charity.

Why contribute assets with long-term gains vs Short-term gains or cash?

To answer this question, let’s use an example. Smart Sara, Short-term Sam, Half-right Harry and Tax-idiot Tom. To see your actual tax rates (Capital Gains, Federal and California State Income Taxes) for 2021, see tables at the end of the post.

Assumptions:

1) Each wants to give $2000 to support a charity, but whether they use cash or check or equities, they’ll need to use $2000 of their stock that year to cover overall expenses

2) They all bought 100 shares of a stock for $10 that has appreciated to $20…but some held it for longer than a year, some less

3) They are all in the 24% Federal Tax Bracket

4) They are California residents (like me, maybe a glutton for punishment) and in the 9.3% tax bracket

(income fits inside the 24% federal tax rate)

5) Capital Gains Tax Rate: It’s a quiz in a sense -based on 3 and 4 above, their Capital Gains Tax rate is 15%

6) Overall charity contribution is minus the taxes

Note: Tax Deduction doesn’t mean that you saved that amount of money. It means that your income was reduced by that amount and thus you’re paying taxes for that reduced “income”.

See “Tax Deduction” below and “Actual Tax Savings” which shows the actual amount of money saved.

Fed Tax Rate      24%

State Tax Rate   9.3%

Capital Gains Tax Rate    15%

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Tax Deduction – Requires Itemizing Taxes

The Tax Cuts and Jobs Act (TCJA) was signed into law in 2017 and significantly increased the standard deduction from $6500 to $12,000 for individuals ($13,000 to $24,000 for married filing jointly), and thus most people are no longer itemizing their taxes. In 2021, the standard deduction will be $12,550 for individuals and $25,100 for married filing jointly. Prior to the TCJA, ~31% of taxpayers made itemized deductions, but now with the higher standard deduction only 13.7% of taxpayers itemize. Does that mean that there are no benefits to a DAF if using the standard deduction? Absolutely not, the DAF is still the smartest way to donate assets to charity. First, you still won’t pay capital gains taxes which depending on your income can be a significant savings. You can plan ahead to make better tax decisions using the DAF. For example, you can plan to use standard deductions in some years, and itemizing in others. Instead of contributing to the DAF every year, you can double up your contributions in one year and plan to itemize your taxes that year to take advantage of the charitable donation, then don’t contribute to the DAF the next year and plan to use the standard deduction. You can still contribute to the your favorite charities every year as the tax deduction only depends on when the money is contributed to the DAF. While I just used a simple example of one year itemizing and the next year using the standard deduction, one could make a sizeable contribution to a DAF that covers charitable contributions for many years (say five years or more), use that year to take the large itemized tax deduction, then use the standard deduction for for the next four of so years until ready to make a large contribution again.

Matching Charitable Donations

 If you company matches, or when certain charities are running fundraising campaigns and have matching during specific periods, the DAF can also be used to increase that donation. We donated to KPBS, and if you listen to KPBS most certainly have heard their quarterly campaign to raise funds. Frequently, you’ll hear that some philanthropist or organization will match your donation “dollar for dollar if you donate in the next 10 minutes”, etc. Contributions from a DAF will take a several days to transact due to admin related to the account after you designate the charity and amount of money to contribute. Now, you’d think one couldn’t get the match that is in a short time window with a DAF, but we learned with a little research and persistence, we could make that happen. We contacted KPBS to explain that we wanted to contribute through a DAF, but also to get the match that was offered. They initially told me that these were time sensitive and it wouldn’t work, and that’s why they prefer you to just contribute with a credit or debit card. Being a stubborn-ass, I persisted and got referred to the department lead. After a few emails and calls between her and Schwab Charitable, KPBS brought it up to their leadership and agreed they would support the match if we emailed when we heard the time for the match, then showed our “confirmation of grant recommend” For additional measure, I asked Schwabe Charitable to email KPBS confirming as well. Win-win for everyone, with a little effort KPBS was able to get double our donation, and we were still able to use our tax-advantaged DAF to make the donation. My current company also matches up to $2000 in charitable donations each year, or we can use volunteer hours to get that company donation.

 If you have questions or recommendations, please comment or send me an email and I’ll get back to you. As I mentioned in the last sentence, some companies will donate actual dollars for your volunteer hours, and I’ll be putting up another post about smart charitable giving by donating your time instead of money.

 2021 Tax Rates

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