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Never a Better Time to Open Your Donor Advised Fund

Home Tax Reduction Never a Better Time to Open Your Donor Advised Fund

  • PhysicianOnFIRE PhysicianOnFIRE 
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    This will be published in a few hours as part of my Sunday Best post, but I know many of you won’t see it there and it will likely generate more discussion here. If you are charitable and have considered a DAF in the past, I think right now is a great time to act. What do you think?

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    Never a Better Time to Open Your Donor Advised Fund

     

    It looks increasingly likely that tax reform will be signed into law and take effect in two short weeks. Everyone will be affected differently by the changes to the tax code, but there are two provisions that make it more likely that you’ll benefit significantly less from future charitable giving compared to giving now in 2017.

    First, the standard deduction will nearly double under proposed tax reform. This means many fewer Americans will benefit from itemizing deductions. If your total deductions don’t exceed the new $24,000 standard deduction, your donated dollars won’t lower taxes one bit.

    Second, your marginal tax rate will most likely be lower in 2018 and beyond. A couple earning from $165,000 to $315,000 (married filing jointly) will be in the 24% federal income tax bracket. Currently, most of that income would be in the 33% federal income tax bracket.

    Why start a donor advised fund now? Doing so will allow you to take a full deduction at this year’s presumably higher marginal tax rate (assuming you itemize currently). Let’s say, for example, that you plan to donate $10,000 a year over the next five years.

    If you donate $10,000 to charity in each of the next five years, you would not receive any deduction unless your other itemized deductions total at least $14,000. The donation would only be fully deductible if your other itemized deductions total at least $24,000. And you will probably be receiving the deduction at a lower marginal tax rate. I expect that to be 24% for us based on my income in the coming year(s).

    Conversely, you could start a donor advised fund with $50,000 in appreciated funds today. You’ll eliminate the capital gains in those funds, get a tax refund of your marginal tax rate (for me, that would be 33% of $50,000 = $16,500 plus a state tax refund). You could then give $10,000 (plus investment returns) from the DAF to your selected charities each of the next five years.

    To me, it’s a no-brainer, particularly if you already have a taxable account with one of the “big three” brokerages that have low cost funds and similar charitable DAF programs. Those being Vanguard, Fidelity, and Schwab, and they make it simple to open a DAF. The latter two can be opened with as little as $5,000 and allow grants from your fund starting at $50. Vanguard’s minimums are steeper at $25,000 to open and $500 for a grant from the fund.

    Finally, don’t think of tax optimization of charitable giving as getting the most back for your donated dollar. Think of it as getting the most money to charity for each dollar you actually part with. You could hand the food shelf a $100 bill or you could give $180 in a tax-deductible manner and it would cost you $100. Which do you think the charity prefers?

    For more information, please see the following posts on the subject:

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #85891 Reply
    FIREchief FIREchief 
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    Joined: 12/10/2017

    Excellent.  Looks to be spot on.  One thing I will caution your readers; this will likely be the busiest year end time for DAFs that there has ever been.  If you have anything that will require interaction with an actual human being, get going as early as possible.  Waiting until after Christmas may have you on the phone wait for hours.  Personally, I’m planning to use this strategy, but am somewhat encumbered by the VTI year end dividend process.  If you donate shares between the ex-dividend date (likely the same as the congressional approval date) and the record date, you don’t receive charitable credit for the dividend (the DAF still receives it and will likely credit it to your fund – trust me, I know from 2016 experience).

    I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

    #85906 Reply
    EJ at Dads, Dollars, and Debts EJ at Dads, Dollars, and Debts 
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    Status: Physician
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    Joined: 12/01/2016

    Awesome point… I suspect I Will open a donor advised fund after my next paycheck (and last for the year) this week. Then I will know where my income lies for the year. I will get a deduction for the loss of possessions with the fire which will be approximately $79,000 and then determine how much I need to donate to get my tax bill even lower….ah the game begins.

     

     

    - EJ @ DollarsandDebts.com

    Cardiologist. Trying to help dads with personal finance so they can focus on the frest of life. Blogger at DollarsandDebts.com

    #85908 Reply
    jfoxcpacfp jfoxcpacfp 
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    I would add TDA to the list of DAF custodians. And I second the recommendations to get on the ball. I believe one of TDA’s 2 administrators closed applications on Friday.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #86017 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
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    Status: Physician
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    Personally, I’m planning to use this strategy, but am somewhat encumbered by the VTI year end dividend process.  If you donate shares between the ex-dividend date (likely the same as the congressional approval date) and the record date, you don’t receive charitable credit for the dividend (the DAF still receives it and will likely credit it to your fund – trust me, I know from 2016 experience).

    Click to expand…

    Interesting. It seems bizarre that you would only get credit for the ex-dividend price if you donated pre-dividend. I would guess the mechanics of that process would vary by custodian, but all the more reason to initiate the process sooner than later, or wait until after the dividend.

    When I opened my first DAF with T. Rowe Price, I believe the transactions were made on 12/26 or 12/27. I was still able to get credit for the donation that calendar year. That late in the game, I think your only option is to stay within the same fund family (i.e. donate funds held at Fidelity to Fidelity Charitable / from Vanguard to Vanguard Charitable, etc…)

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #86023 Reply
    FIREchief FIREchief 
    Participant
    Status: Other Professional
    Posts: 48
    Joined: 12/10/2017
    Personally, I’m planning to use this strategy, but am somewhat encumbered by the VTI year end dividend process.  If you donate shares between the ex-dividend date (likely the same as the congressional approval date) and the record date, you don’t receive charitable credit for the dividend (the DAF still receives it and will likely credit it to your fund – trust me, I know from 2016 experience). 

    Click to expand…

    Interesting. It seems bizarre that you would only get credit for the ex-dividend price if you donated pre-dividend. I would guess the mechanics of that process would vary by custodian, but all the more reason to initiate the process sooner than later, or wait until after the dividend.

    When I opened my first DAF with T. Rowe Price, I believe the transactions were made on 12/26 or 12/27. I was still able to get credit for the donation that calendar year. That late in the game, I think your only option is to stay within the same fund family (i.e. donate funds held at Fidelity to Fidelity Charitable / from Vanguard to Vanguard Charitable, etc…)

    Click to expand…

    It did seem bizarre to me at first, but after a bit of thought it makes perfect sense.  I believe that you are referring to the “ex-dividend” price as the share price reduced by the per share dividend amount.  If you donate on or after the ex-dividend date, you receive fair market value credit, which is the reduced price.  Now the DAF “owns” your shares while they turn around and sell them.  Settlement takes (I think) two days, which makes them the owner of record on the record date.  That means the fund pays them the dividend.  With Fidelity, at first I was told that the dividends would not wind up in my DAF, but they did a week or two later.  It was only a small amount, so I may have missed out on less than $10 in tax benefit, but it was a lesson learned.  This year I expect my ye DAF contribution to be much larger due to the tax law changes, so I’ll be certain to donate them either before the ex-dividend date or after the record date (VG doesn’t actually forecast the record date, but it can be determined).  VG shows a forecasted ex-dividend date of 12/21, which will likely make the record date 12/26.  That should give me 12/27 to 12/29 to complete my donations.  If anybody has further clarifications on these dates, I will be greatly interested.  Thanks.

    I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

    #86092 Reply
    Vagabond MD Vagabond MD 
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    Status: Physician
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    Thank you for writing (and posting) this. I have been trying to explain this to a few of my more financially savvy partners, and by the looks on their faces, I have not been getting through. I have forwarded your blog to them.

    I have had an account with the Fidelity Charitable Gift Trust since 2003, and it is one of the better financial moves I have made over the years.

    "Wealth is the slave of the wise man and the master of the fool.” -Seneca the Younger

    #86104 Reply
    Liked by adventure, hatton1
    hatton1 hatton1 
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    I have yet to find a person in my real life who has of them either.

    #86128 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
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    Status: Physician
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    Joined: 01/08/2016
    I have yet to find a person in my real life who has [heard] of them either.

    Click to expand…

    Meanwhile, here are more than a dozen bloggers who have them and most have written about them:

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #86170 Reply
    Liked by hatton1
    hatton1 hatton1 
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    Joined: 01/11/2016

    You are spreading the word

    #86218 Reply
    q-school q-school 
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    is it correct to say those with significant mortgages and income tax will still likely itemize?  if not, even relatively modest donations relative to physician incomes likely will push them over the top?

    the benefit for the DAV for those individuals will be felt less?

     

    #86223 Reply
    hatton1 hatton1 
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    I think I will be itemizing as long as I have a business and file a schedule c.

    #86227 Reply
    Avatar FIREshrink 
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    Joined: 01/11/2017

    Every day is a great day to give to charity.

    The only better day would have been yesterday.

    #86241 Reply
    Liked by q-school
    FIREchief FIREchief 
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    Joined: 12/10/2017

    Every day is a great day to give to charity.

    The only better day would have been yesterday.

    Click to expand…

    No disagreement, however this thread is more about “how” to give to charity than “when.”   😎

    I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

    #86264 Reply
    Avatar Bmac 
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    Status: Physician
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    Joined: 10/21/2017

    To be fair, I would say this post is actually about “how” to donate to charity in order to maximize personal tax benefits under current tax law and control “when” those donations are made when the future tax benefits may be much less based on current proposed tax legislation.

    #88028 Reply
    Liked by q-school

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