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Saving Your Charitable Deduction

Saving Your Charitable Deduction

November 07, 2019

Since the 2017 Tax Reform Act, most people have had limited opportunity to benefit from itemized deductions.  We all know about the $10,000 limit on property tax deductions, but on top of that, the new expanded standard deduction means that a couple needs a total of $24000 in deductible expenses before they receive any reduction in taxes.  There isn't much that can be done regarding your property taxes - but if you ordinarily make sizable charitable donations, there are a few tricks that might allow you to put some of your donation back on the government. 

One approach is to setup a Donor Advised Fund.  I mentioned this last year and subsequently helped a couple of clients setup a fund with Vanguard Charitable.  Here is how it works:  

1. You make an irrevocable donation to your account at the Donor Advised Fund.  

2. You take an IMMEDIATE deduction for the entire donation, even though it is still in your account

3. You make distributions out of the account to qualified charities over time.  

4. Replenish the fund with a new donation when it runs low. 

Let's say you and your spouse make $10,000 in charitable donations each year, and have $12,000 in property taxes - but no other significant deductions.  Well, with $22,000 in deductions, you will simply take the $24,000 standard deduction.  But using a donor advised fund, you can make 3 years worth of donations at a time - or $30,000, then distribute as you see fit.  By making one really big donation, you will be able to deduct a large portion of your donation.  

Of course, you could accomplish the same thing by gifting the $30,000 directly to the charity, but people often prefer to donate in smaller bites over time, or may not even be sure yet who they want to donate the money to.  A donor advised fund may fit the bill.  There is still time to create a fund for 2018, but don't wait until the last minute.  You need to create the fund and make a qualifying deposit to it before year end.