Category Financial Planning

3 Reasons to Set Up a Donor-Advised Fund to Maximize Your Charitable Tax Deductions

Using donor-advised funds is a more advanced tax strategy that has gotten more popular recently with the introduction of the Tax Cuts and Jobs Act (TCJA) in February 2020. The TCJA nearly doubled the amount of the standard deduction, which makes it less advantageous to itemize deductions such as charitable contributions. For people with a lot of charitable contributions, donor-advised funds are one option to still get a deduction for charitable contributions.

What is a donor-advised fund?

A donor-advised fund (DAF) is a registered 501(c)(3) charitable organization that accepts contributions and generally funds other charitable organizations. While the concept of a donor-advised fund has been around for nearly 100 years, they were typically only used by the ua-wealthy. And while it is true that donor-advised funds are still not going to be useful for the vast majority of people, recent tax law changes have made their use more prevalent.

You can set up a donor-advised fund with most brokerages, including Fidelity, Vanguard, and Bank of America. You can donate cash, securities, or other types of assets to the DAF. The exact list of assets eligible for donation depends on the brokerage. After you have contributed, you can then make charitable contributions from the balance of your account.

You can maximize your charitable tax deductions in one year

One common reason that people set up donor-advised funds is to maximize their charitable tax deductions in a particular tax year. To show why this can be beneficial, I’ll use an example:

Our example family files their taxes married filing jointly and has regular charitable contributions of $20,000 per year. The standard deduction in 2020 for married filing jointly is $24,800. Because their amount of charitable deductions is less than the standard deduction, they may not see any tax benefit from their charitable contributions (depending on their amount of other itemized deductions). In 2021 they again plan to contribute $20,000 to charitable organizations and again are unlikely to see any tax benefit from doing so.

Now consider this same family now decides to set up a donor-advised fund in 2020. They have extra money sitting around in low-interest savings or checking account or in a taxable investment account. So they set up a donor-advised fund in 2020 and fund it with $40,000 in cash, stocks, or other assets. They are eligible to take the full $40,000 as an itemized deduction, even if they only use $20,000 to donate to the charity of their choice. Then in 2021, they can donate the remaining $20,000 to their preferred charity. They will not be able to deduct any charitable contributions in 2021 but can instead take the raised standard deduction amount.

You may be able to deduct the full value of stocks or other investments

Another reason you might want to set up a donor-advised fund is that you may be able to deduct the full value of stocks or other investments. Again, I’ll use an example to help illustrate the point.

Let’s say that you have shares that you purchased for $20,000 that are now worth $50,000. Many charities, especially smaller organizations, are not set up to accept donations of stocks or other investments. So if you want to donate that $50,000 to charity, you may have to liquidate your shares. This will mean that you will have to pay tax on the proceeds.

With a donor-advised fund, you can donate the shares to your fund and deduct the full fair market value of your shares. Then the fund can make the contribution to the charity of your choice.

Donate a wide range of assets

Another benefit to setting up a donor-advised fund is the ability to donate a wide range of different classes of assets. As we mentioned earlier, many charities are not set up in such a way to be able to accept non-cash donations. While the exact list of assets that a donor-advised fund can accept varies by the firm running the fund, it generally will include more types of assets than a typical charity.

Why you might not want to set up a donor-advised fund

While there are plenty of advantages to setting up a donor-advised fund, there are a few things that you might want to watch out for.

  • It’s definitely more complicated than just making charitable contributions on your own. You may find that the tax savings are not worth the extra hassle.
  • On top of the added layer of complexity, most firms with DAFs charge administrative fees that can cut into your rate of return.
  • You may be limited on the charities that you can donate to. Each donor-advised fund typically will have a list of eligible charities. So you may find that a charity that you want to donate to is not available.
  • You also lose control over the funds that you donate – the donation to the fund is irrevocable, meaning once you’ve donated to the fund you cannot get the donation back. While most advisors state that they will donate the money as you direct, they are not legally required to do so.
  • The money in a DAF is invested, so it may lose value. That means that the amount you were hoping to donate may be less than you were anticipating. You also typically have a limited range of investments available for your investment, and those funds also often come with fees.

It’s also important to keep in mind, the annual income tax deduction limits for gifts to donor-advised funds, are 60% of Adjusted Gross Income for contributions of cash, 30% of AGI for contributions of property that would qualify for capital gains tax treatment; 50% of AGI for blended contributions of cash and non-cash assets.

The post 3 Reasons to Set Up a Donor-Advised Fund to Maximize Your Charitable Tax Deductions appeared first on MintLife Blog.

Source: mint.intuit.com

5 Financial Goals to Start in 2021

 

Although many people start New Year’s resolutions in January, there’s nothing magical about January with regards to self-improvement. Still, the best time to make a change or set a goal is today, so if you’re ready to level up in your life, there’s no time like the present. Here are five financial habits that you might consider starting this year. 

Commit to a written budget (and review it often)

The very first thing that you’ll want to do is commit to a budget. Having a budget is the cornerstone and foundation for financial success. Knowing where your money is going (and not going) can help you understand where you’re at. If you’ve had trouble making or keeping a budget, resolve to start a budget this year. A tool like Mint can be a great way to put your budget on autopilot.

Remember that a budget is just a tool to help you to not spend money on the things you don’t find important so that you have money to spend on the things that you do find important. If you already have a budget, make it a habit to review your budget, at least monthly. That can help you identify where you might be able to make improvements.

As you start or recommit to your budget, make sure that it is written down. Budgets that are not written down, like goals, tend to fall by the wayside easily.

Start (or build) your emergency fund

Another great habit to get into in 2021 is starting an emergency fund. An emergency fund should be one of the very first things you do with any extra money you have in your budget. Even before working on eliminating your debt or saving for retirement, it makes a lot of sense to set aside money for emergencies.

A good rule of thumb is to start with a $1,000 emergency fund. It may not cover catastrophic emergencies, but it can help you to avoid having to spend on your credit cards when the unexpected happens. After you’ve started that basic emergency fund, then you can continue to build it up while also starting to pay off debt or invest for the future. If you can, it’s a good idea to have a couple of months of expenses in your emergency fund. That way you’re covered for a while in case you lose an income source or have a major emergency.

Make a plan to eliminate your debt

The next habit to start or continue this year is to eliminate your debt. Depending on how much debt you currently have, it may not be realistic to pay off all of your debt in 2021. But no matter what, you should have a plan in place. There are a variety of different debt repayment strategies – the debt snowball and the debt avalanche among many. It’s important to pick a debt payoff approach that works for you, and that you can stick to. Make it a habit to spend less than you earn and work towards becoming debt-free.

Spend with a purpose

Another great habit that can help you live within your means is to spend with a purpose. Spending with a purpose means that you are conscious with your spending. If you ever find yourself wondering where all your money has gone, you may benefit from being more deliberate with your spending.

Many people find success by setting a rule about any non-essential spending. For example, before you make any purchases besides essentials like rent, utilities, and debt payments, you must write it down. Just the act of writing it down (or taking a picture of it) is enough for many people to be more deliberate and conscious about what they choose to spend their money on.

Pay yourself first, and make sure to give yourself a raise

If you’re like many people, you may have good intentions of saving money each month, but at the end of the month, you find there’s nothing left over after all the bills are paid. One habit that people who are successful financially have is to pay themselves first. Put your savings money aside at the BEGINNING of the month. It’s a bit of a mental trick, but many people find that having that money out of sight helps them to save more.

Another financial habit to start is to always give yourself a raise. Whenever you get a raise at work or come across any “extra” money, IMMEDIATELY put it either in your emergency fund or use it to pay down your debt. Putting any raise or extra money towards your savings (instead of increasing your standard of living) is a great habit to start. 

This is a great habit to start, especially if you are young or just starting out in your professional life.  Of course, paying yourself first and giving yourself a raise, doesn’t mean that you have to only eat ramen or can’t have nice things. But thanks to the magic of compound interest, the sooner you start to save and invest, the better off you’ll be.

The post 5 Financial Goals to Start in 2021 appeared first on MintLife Blog.

Source: mint.intuit.com