Save Yourself Some Money with a Donor-Advised Fund

• 2 min read

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QUESTION:

I just lost my state and local tax deductions in the recent tax reform, and I have no mortgage interest to deduct. Is there anything I can do to lower my taxes?

ANSWER:

The new tax law eliminates miscellaneous deductions, and limits state and local tax deductions to $10,000. This means married taxpayers without a mortgage can take the $24,000 standard deduction, or $10,000 plus their charitable deductions. This can significantly limit the tax benefit of philanthropic giving. For example, a couple that gives $15,000 annually would only get an extra $1,000 of tax deductions ($10,000 of state and local deductions plus $15,000 of charitable versus just using the $24,000 standard deduction). Fortunately, there may be a strategy to leverage the new structure to your advantage.

Donor-advised funds allow individuals or families to contribute cash or stock in one year for an immediate tax deduction and then parse out that contribution to charities over future years. By using a donor-advised fund, one can overload a single year with excess charitable deductions. Then use the higher standard deduction to their benefit in years going forward. In our above example, if the couple made the next five years of donations at once, they would generate considerable tax savings:

In year 1, they deduct $85,000 ($15,000 x five years in charitable deductions plus $10,000 in state and local taxes). In years 2-5, they take the standard deduction of $24,000. Over the five years, they get $181,000 of deductions. This provides considerable tax savings compared to filing for just $25,000 of deductions per year, or $125,000 over the five years, and their favorite charities get the same amount of money in the same years.

This information is for general information use only. It is not tailored to any specific situation, is not intended to be investment, tax, financial, legal, or other advice and should not be relied on as such. AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product.

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