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Maximize Your Charitable Giving: The Donor Advised Fund


charitable giving strategies via gift bundling


Charitable giving is a noble act, and while most of us don't donate for the tax benefits, it's essential to know how to maximize these benefits to give even more. One common issue many donors face is missing out on tax deductions because they don't itemize their deductions. In this blog post, we’ll explore how to solve this problem using a Donor Advised Fund, illustrated with a real-life example.


The Problem: Missing Out on Tax Deductions


Let's consider Bob, a generous individual who donates $12,000 each year to his church. Despite his charitable nature, Bob doesn't get any tax deductions for his donations. Why? Because with the current standard deduction levels, his annual giving isn't enough to justify itemizing his tax returns.

The Solution: Donor Advised Fund


A Donor Advised Fund (DAF) acts like a charitable bank account that allows you to make donations and get tax deductions in a more flexible manner. Here's how it works:

  1. Initial Donation: Bob can take three years' worth of his annual donations, which amounts to $36,000, and contribute it to a Donor Advised Fund.

  2. Tax Deduction: By doing this, Bob can itemize his deductions and claim the $36,000 in the year he makes the initial donation to the DAF.

  3. Scheduled Giving: In the subsequent years (2022, 2023, and 2024), Bob can direct the DAF to give $12,000 each year to his church, just as he was doing before.

  4. No Change for the Recipient: The church continues to receive the same annual donation from Bob, with no interruption or change in the amount.


The Benefits of Charitable Giving

  1. Maximized Tax Deduction: Bob gets to claim a significant tax deduction in the year he contributes to the DAF.

  2. Flexibility: Bob has the flexibility to direct the funds to his church or any other charitable organization over the years.

  3. Simplified Record-Keeping: All donations are consolidated into one account, making it easier for Bob to manage his charitable giving.

  4. IRS is the Only Loser: The only entity that misses out on this arrangement is the IRS, as Bob is now able to claim a deduction he otherwise wouldn't have been able to.


Conclusion


Charitable giving is not just about generosity; it's also about smart financial planning. A Donor Advised Fund offers a win-win solution for both the donor and the recipient. If you're in a similar situation as Bob, consider talking to a tax advisor to explore how a Donor Advised Fund can benefit you. Remember, if you're giving, make sure you have a plan to make the most out of it.



-Jeb


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