Spreading Tax-Efficient Holiday Cheer
A Donor-Advised Fund, or DAF, is a giving account that allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants later.
Hopefully, you are in full Holiday Spirit Mode and looking to spread some of the cheer to your favorite charities. We want to help make sure that your gifts have the biggest impact, so we thought we’d share one of our favorite tax-efficient strategies.
We recently worked with a family who was planning to give a gift of $1,000,000 to a particular charity. We worked with the client to ensure the full amount of their generosity was received.
They originally planned to make this gift at the end of the year out of their investment account. The problem with this plan is that the money has already been taxed. At their high-income limit, it would take close to $2,000,000 in income to save enough to give $1,000,000. You see, roughly half of their income goes to cover their tax bill leaving only half to go to the charity they support.
During our planning meeting with this client, we learned that their income will remain high next year and is expected to steadily increase. This family earns well over the highest federal income tax bracket of $539,901. Setting up a donor-advised fund allows this family to give the full contribution to a charity.
Keep in mind there are some limitations on these donations. Annual income tax deduction limits for donations made to donor-advised funds are:
30% of adjusted gross income (AGI) for contributions of non-cash assets held more than one year, or
60% of AGI for contributions of cash
Donations exceeding limits can be carried over for up to five tax years
On top of being high earners, these clients are diligent savers and investors. They regularly contribute to their brokerage account to supplement their savings. These investments are invested tax-efficiently, but they will still be subject to capital gains when they are sold. As a result, even if these investments are held long enough to be eligible for long-term capital gains, they will still pay close to 30% in taxes.
20% Capital Gains tax rate for Married making $501,601 or more
3.8% Net Investment Income Tax for Married making $250,000 or more
5.499% North Carolina Capital Gains tax on all profits derived from capital assets.
The Donor Advised Fund saved this couple from paying ~29.3% or $293,000 in capital gains taxes. After realizing that they had saved this much money, they decided to add it to their donation - an incredible gift from an incredibly generous family.
Setting up a Donor Advised Fund is easy. Moving the appreciated stock into the donor-advised fund takes a little bit of work but magnifying the impact of their charitable donation makes it all worth it. Let us know your favorite charities and how we can help magnify your gift!