Year-End Giving and Donor Advised Funds

The opportunity and need to support causes important to us has possibly never been more acute in recent memory than this year, and that’s not likely to change in 2021.

In my last post, I talked about various deductions available to you if you itemize. These are known as "below the line” deductions, because they happen after your AGI is calculated. Among others is the deduction for charitable contributions: in normal years, you can deduct up to 60% of your AGI in the form of qualified charitable cash contributions, or 30% if you donate other assets.

This, of course, is not a normal year. and to encourage giving, there are some unique tax incentives that apply to 2020.

First off: everyone can take a deduction of up to $300 for cash donations made to charitable organizations, even if you don’t itemize. This is an “above the line” deduction, because it will reduce your AGI.

In addition, if you do itemize your deductions, the 60% limit is suspended - this means you can have your dollars go further.

What if you are feeling called to make a difference, but need more time to research organizations? What if you want to make it a legacy, or want to involve the kids over time? Establishing a donor advised fund this year will allow you to contribute as much as you like, and then make the gifts to your chosen organizations when you’re ready.

It works like this: you establish your account at one of several donor advised funds (these are the philanthropic arms of companies like Vanguard, Fidelity and Schwab) and fund it with the amount you’re comfortable giving now. You can take a deduction for that, but because it’s a charitable donation, you can’t undo it - it’s considered a completed gift. You do retain control over when and to what organization the money is given eventually, and over how it’s invested while it’s in the account. So your current-day contribution has the potential to grow quite a bit over time, but remember that the idea is to eventually choose the recipients of your contributions.

This can be attractive for a few reasons: you have a pool of money that’s already earmarked for donation should you identify a cause later that you’d like to support; you can time your deduction to coincide with when it would be most useful to you, and potentially contribute more that way. And while it seems like a strategy for the well-off, it’s quite accessible: many have no minimum at all to start the fund, and the fees are quite reasonable. The fund itself also does the legwork of determining which organizations are eligible for a qualified contribution, which makes the giving process seamless.

So, you might as well take advantage of the incentive to give!