One of the topics I talk about often flies under the radar for other financial advisors
As a financial advisor, my job covers many topics that include showing clients how to save money. One of the topics I talk about often flies under the radar for other financial advisors.
I’m talking about maximizing the amount of money you get to keep because you donate to charitable causes and generate income that changes from year-to-year.
You understand charitable donations qualify for federal income tax deductions. For example, if you donate $20,000 annually to your favorite charity, you decrease your federally taxed income by $20,000. What happens when your income changes from one year to the next? Let’s see how a donor-advised fund can help you save even more money on charitable contributions.
What is a Donor Advised Fund?
Look at a donor-advised fund like an investment account for the charities you love to make contributions to. You create the fund for the sole reason of supporting charities you care the most about in the form of cash, securities, and other types of short-term financial assets. The money deducted for charitable contributions allows you to invest in assets for tax-free financial growth.
Donor-advised funds represent the fastest-growing financial strategy because of several reasons.
- Contribute a wide variety of financial assets
- Take advantage of tax benefits
- Invest donations for tax-free growth
- Make the financial recordkeeping simple
- Complement the strategies used to take care of your heirs
Let’s say you make donations to your favorite charity that funds the special cause for the next five years. You can deduct the entire amount of your donations over the course of the next five years in the same year of filing a federal income tax form. Donating five years’ worth of contributions to your favorite charitable cause in one year is an especially effective financial planning strategy during a year when you generate a higher-than-average income.
What You Need to Know Before You Dive In
As with any type of strategy for donating financial assets to a charitable organization, starting a donor-advised fund makes sense if you plan to donate financial assets in the future. This is because you cannot take the money back after you commit to donating your financial assets to a charity. You sign a document that transfers your financial assets to a donor-advised fund that is managed by a properly credentialed administrator.
Here is an example that describes the tax benefits of starting a donor-advised fund:
You cash in company stock valued originally at $100,000 that has appreciated to a value of $300,000. That is a financial gain of $200,000. Typically, you donate $20,000 to the same charitable organization each year. You have the opportunity to put five years’ worth of donations to the same charity into a donor-advised fund and take a federal income tax deduction of $100,000 this year. The financial gain of $200,000 realized on an increase in the value of company stock now becomes an income tax liability of just $100,000.
Learn more about how to optimize the benefits of a donor-advised fund by speaking with a certified financial planner.