Gratitude and giving are filling a need in American lives as we look for ways to improve our quality of life, our communities and the world at large. Giving encompasses both time and money. It’s a way of sharing what we have to make someone else’s life better. And studies show there’s no better way of finding happiness than in giving to others.

Most of us have been giving as we can over our lifetimes. But as we build our own financial security, many people are looking for how to take giving to the next level. Instead of writing checks at the kitchen table, we want to consolidate our giving and use technology to simplify and amplify how we use our resources.

Other than making outright gifts of either appreciated securities or cash, there are two popular ways of giving that we’ve seen explode in popularity in the past few years.

  • Qualified charitable distributions from traditional IRAs allow you to give up to $100,000 a year from a traditional IRA to a qualified charity. You have to be age 70½ to be eligible to use this strategy.
  • Donor advised funds (DAFs) are charitable accounts that you can set up at brokerages like Vanguard, Fidelity or Schwab as well as through many other organizations. Whatever you contribute qualifies as a deduction subject to IRS rules and you can give the money to charities over a number of years. They are easy to set up, have minimal costs, centralize charitable giving, and simplify tax records.

How Do Donor Advised Funds Work?

You open an account (a lot like setting up a mutual fund account), fund it with at least the minimum dollar amount set by the specific DAF, choose how you want to invest the money and start making grants. Add more money when you choose to. Set up one-time gifts or recurring gifts. Grants must be to qualified charities. No friends or relatives or other people you want to help out. Keep the checkbook for those kinds of gifts.

When you make a contribution to your Donor Advised Fund, you get an immediate tax deduction. It can make sense to give larger contributions in years when you have higher taxable income. This is one of the few ways you can increase deductions over the standard tax deduction and be able to itemize.

Giving money away to qualified charities is easy. You typically go to the DAF website, choose Make a Grant and type in the organization you want to give money to. Up pops your charity, you put in how much you want to give, you can specify any instructions (like for a particular purpose or “in honor of” or “in memory of”), and when you want the gift to go to the charity.

Simplicity and Ease

The super wealthy used to set up private foundations (and of course many still do). But more often now, they will use a DAF or a combination of both types of charitable vehicles.

There are no legal fees to set up a DAF. The annual administrative fees are minimal. When you set up the account, you can contribute either cash or securities. Many people find it advantageous to contribute appreciated stock. You don’t pay capital gains tax to liquidate the stock. Neither does the DAF because it’s a charitable organization. It’s great for donating highly concentrated positions of stock.

When you contribute you get an immediate tax break. If you start with $30,000, you get a $30,000 tax deduction. That’s going to be higher than the standard deduction. You can give away all of that right away or give away smaller amounts over time. You could give $5,000 away for five years. You don’t get a tax deduction when the money goes to the charity because you got your tax break upfront.

For IRS purposes, you can only deduct up to 30% of Adjusted Gross Income (AGI) for capital gains securities or 60% for cash. Anything above that carries forward for the next five years. You may want to talk to your financial advisor or CPA to figure out a maximum deduction in any particular year. These rules can be complex, so it’s best to get some advice on larger gifts. And of course there are compelling reasons to give to others regardless of a tax deduction.

While the money is in the DAF, you can invest it. Any growth is tax-free. If you know you want to give it away soon, you may choose to put it in a money market within the DAF. Otherwise, you can choose from a variety of investment options within the plan. This means your DAF balance can go up or down, depending on market volatility.

Family Values

One of the greatest values you can pass on to your kids and grandkids is how to help others. It’s fun to get the whole family involved in how to make grants from the DAF. Imagine Thanksgiving where everybody gets to choose where to give $500 or $50 or whatever you envision you can give.

So maybe your five-year old granddaughter wants to give to help puppies. Or your teenage grandson wants to give to help space exploration. Or conservation. Or social justice. Or medical research. The skies (and your imagination) are the limit.

The point is you’ve opened up a family discussion about what you, as a family, value. It can be a celebration of how you share values or how you are different in seeing the world.

You can name successors for your DAF. After you (and your spouse) are gone, your kids (or whomever you name) can carry on the legacy of giving.

Using Qualified Charitable Distributions (QCDs) to Reduce Required Minimum Distributions

Current law allows you to give up to $100,000 to qualified charities from your IRA. By doing this, you don’t recognize income as you would with a traditional required minimum distribution. You also don’t get an income tax deduction.

A QCD can help keep taxable income lower. That helps if you are bumping up against the thresholds where you pay more tax on Social Security benefits or higher premiums for Medicare. You don’t have to itemize to use the QCD and can just take the standard deduction.

To be able to make a qualified charitable distribution (QCD):

  • You must be age 70 ½ or older.
  • You typically use traditional IRAs or inherited IRAs to make these gifts. Generally 401(k) or 403(b) accounts cannot be used. You can, however, roll over your 401(k) or 403(b) to a traditional IRA and then make the donation.
    • Roth IRAs are generally better left to heirs as they have already been taxed and will not be taxed again.
  • Only the taxable portion of the IRA is eligible for QCDs. No after-tax or non-deductible contributions can be used.
  • Funds must go directly to the charity. Not to you and then the charity. You can get a check made out to the charity and present it to them though. Just don’t get a check made payable to you.
  • You can’t give your QCD to a donor advised fund. Just straight to the charity.
  • You can’t give your QCD to a private foundation or supporting organization.
  • You can’t receive any benefits in return for the gift. So no silent auction baskets or special parking passes. Pay for those separately to avoid a problem.

Remember to tell your CPA that you’ve made a QCD. There is nothing on your 1099-R that signals that to your accountant.

You can set up check writing on your IRA or make charitable distributions by filling out a custodial form.

Additional Considerations for Both Types of Giving

  • You can’t use DAFs for pledges. This is a grey area, but once you give your money to the DAF, it’s irrevocable and the DAF is the one actually making the grants. They don’t want to commit to pledges. Tread carefully here.
  • 100% of the gift must go to charity. So no mugs or food or entertainment.
  • You must give the money away. Typically the DAF wants you to give at least 20% away every five years.
  • You can give illiquid assets to a DAF like real estate, privately held company stock, or even the Bitcoin. The rules for these types of assets vary by each DAF, so learn more at the specific website.
  • You can’t make a Qualified Charitable Distribution (QCD) to a Donor Advised Fund. It has to go directly to charity.

Summary

As you take your charitable giving to another level, you can become more savvy about who you want to give to, how that money is being used, how you can use strategic philanthropy to expect accountability from the organizations that you support. You can start to think about giving larger gifts instead of the shotgun approach as you are blitzed with solicitations.

Learning more about charitable giving can open up a whole new dimension in your life. Donor advised funds or making qualified charitable distributions just might be ways that you can do more by doing good.

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Disclosures
The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.